Full text of "Russian organized crime in the United States : hearing before the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, United States Senate, One Hundred Fourth Congress, second session, May 15, 1996"

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S. Hrg. 104-604

RUSSIAN ORGANIZED CRIME IN THE
UNITED STATES

Y 4, G 74/9: S, HRG. 104-604

Russian Organized Crine in the Unit...

HEARING

BEFORE THE

PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

MAY 15, 1996

Printed for the use of the Committee on Governmental Affairs

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U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington. DC 20402
ISBN 0-16-053632-4

S. Hrg. 104-604

RUSSIAN ORGANIZED CRIME IN THE
UNITED STATES

/ 4. G 74/9; S, HRG, 104-604

Russian Organized Crine in the Unit...

HEARING

BEFORE THE

PERMANENT
SUBCOMMITTEE ON IN\^STIGATIONS

OF THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

MAY 15, 1996

Printed for the use of the Committee on Governmental Affairs

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053632-4

COMMITTEE ON GOVERNMENTAL AFFAIRS

TED STEVENS, Alaska, Chairman
WILLIAM V. ROTH, Jr., Delaware JOHN GLENN, Ohio

WILLIAM S. COHEN, Maine SAM NUNN, Georgia

FRED THOMPSON, Tennessee CARL LEVIN, Michigan

THAD COCHRAN, Mississippi DAVID PRYOR, Arkansas

JOHN MCCAIN, Arizona JOSEPH I. LIEBERMAN, Connecticut

BOB SMITH, New Hampshire DANIEL K. AKAKA, Hawaii

HANK BROWN, Colorado BYRON L. DORGAN, North Dakota

Albert L. McDermott, Staff Director
Leonard Weiss, Minority Staff Director
Michal Sue Prosser, Chief Clerk

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

WILLIAM V. ROTH, Jr., Delaware, Chairman
TED STEVENS, Alaska SAM NUNN, Georgia

WILLIAM S. COHEN, Maine JOHN GLENN, Ohio

FRED THOMPSON, Tennessee CARL LEVIN, Michigan

THAD COCHRAN, Mississippi DAVID PRYOR, Arkansas

JOHN MCCAIN, Arizona JOSEPH I. LIEBERMAN, Connecticut

BOB SMITH, New Hampshire DANIEL K. AKAKA, Hawaii

HANK BROWN, Colorado BYRON L. DORGAN, North Dakota

Harold Damelin, Chief Counsel and Staff Director
Daniel S. Gelber, Chief Counsel to the Minority
Carla J. Martin, Chief Clerk

(II)

CONTENTS

Opening statements: Page

Senator Roth 1

Senator Lieberman 6

Senator Cohen 6

Senator Nunn 62

WITNESSES

Wednesday, May 15, 1996

George J. Weise, Commissioner, U.S. Customs Service 10

James E. Moody, Deputy Assistant Director, Criminal Investigative Division,
Federal Bureau of Investigation 15

Edward L. Federico, Jr., Director, National Operations Division, Criminal

Investigation, Internal Revenue Service 17

Igor Nikolayevich Kozhevnikov, Deputy Minister of Interior, Russian Ministry
of Interior Affairs 22

Michael Franzese, Former Capo, Colombo Organized Crime Family 36

Anthony Casso, Former Underboss, Lucchese Organized Crime Family, ac-
companied by Matthew Brief, Law Firm of Brief, Kesselman, Knapp and
Schulman 43

An Anonymous Russian Criminal 49

Daniel Mackey and Ralph Cefarello, Detectives, New York City Police Depart-
ment 54

William Pollard, Detective, Organized Crime Intelligence Division, Los Ange-
les Police Department 56

An Anonymous Witness, Undercover Police Officer from Another City 59

Alphabetical List of Witnesses

Anonymous Russian Criminal:

Testimony 49

Prepared Statement 172

Anonymous Witness:

Testimony 59

Prepared Statement 197

Casso, Anthony:

Testimony 43

Prepared Statement 170

Cefarello, Ralph:

Testimony 54

Prepared Statement 179

Federico, Edward L. Jr.:

Testimony 17

Prepared Statement 140

Franzese, Michael:

Testimony 36

Prepared Statement 162

Kozhevnikov, Igor Nikolayevich:

Testimony 22

Prepared Statement 156

Mackey, Daniel :

Testimony 54

Prepared Statement 179

(III)

Page

Moody, James E.:

Testimony 15

Prepared Statement 120

Pollard, William:

Testimony 56

Prepared Statement 182

Weise, George J.:

Testimony 10

Prepared Statement 100

APPENDIX

Exhibits

1. Chart, Heroin Smuggling Organizations in New York: Associated with
FSU Criminal Network in Northeast U.S., prepared by the U.S. Customs
Service 73

2. Chart, Money Laundering, prepared by the U.S. Customs Service 74

3. Chart, Russian/Eurasian Organized Crime: Present Day Challenge, pre-
pared by the U.S. Customs Service 75

4. Chart, How the Money Flows, prepared by the U.S. Customs Service 76

5. Charts, U.S. Customs Assistance to Former Soviet Union and Central

and Eastern Europe, prepared by the U.S. Customs Service 77

6. States with Significant Ethnic Russian/Eurasian Population, prepared

by the Federal Bureau of Investigation 84

7. Field Offices with Active Investigations on Eurasian Organized Crime
Groups, prepared by the Federal Bureau of Investigation 85

8. Eurasian Organized Crime Groups Operating in the United States, pre-
pared by the Federal Bureau of Investigation 86

9. Eurasian Organized Crime Groups Active in the United States, prepared

by the Federal Bureau of Investigation 88

10. Chart, Structure of Daisy Chain Participants, prepared by the Internal
Revenue Service 89

11. Chart, Pennsylvania Department of Revenue, Bureau of Motor Fuel
Taxes, Reported Taxable Diesel Gallons, prepared by the Internal Reve-
nue Service 90

12. Chart, Motor Fuel Tax Fraud Indictments, prepared by the Internal
Revenue Service 91

13. Letter from Mark W. Distaso, Commander, Special Investigations Bu-
reau; Sergeant Matt Wojnarowski, Supervisor, Intelligence/Organized
Crime Unit; and Agent Gerald Uebel, Lead Investigator, Intelligence/
Organized Crime Unit, City of Glendale California Police Department,
to Michael Bopp, Subcommittee Counsel, Permanent Subcommittee on
Investigations, dated May 10, 1996 92

14. Letter from Gloria Bryant, Director, Office of Congressional Affairs, to
Stephen Levin, Counsel, Permanent Subcommittee on Investigations,
dated August 19, 1996 97

RUSSIAN ORGANIZED CRIME IN THE UNITED

STATES

WEDNESDAY, MAY 15, 1996

U.S. Senate,
Permanent Subcommittee on Investigations,
OF THE Committee on Governmental Affairs,

Washington, DC.

The Subcommittee met, pursuant to notice, at 9:40 a.m., in room
SD-342, Dirksen Senate Office Building, Hon. William V. Roth, Jr.,
Chairman of the Subcommittee, presiding.

Present: Senators Roth, Cohen, Nunn, Lieberman and Dorgan.

Staff Present: Harold Damelin, Chief Counsel and Staff Director;
Daniel S. Gelber, Minority Chief Counsel; Eric Thorson, Chief In-
vestigator; Stephen H. Levin, Senior Counsel; Michael Bopp, Coun-
sel; Carla J. Martin, Chief Clerk; Ariadne Allan, Investigator; Sal-
lie B. Cribbs, Executive Assistant; Jack Cobb, Counsel; Deborah
McMahon, Investigator; Susanne Routhier, Librarian; Mary Ailes,
Staff Assistant; Alan Edelman, Counsel to the Minority; Rick Keen-
an, Detailee; Ian Brzezinski (Senator Roth); Susie Cohen (Senator
Roth); Verna Hensley (Senator Roth); Rick Valentine (Senator
Smith); Jeremy Bates (Senator Dorgan); Sandra Bruce (Senator
Levin); Nina Bang-Jensen (Senator Lieberman); and Helen Albert
(Senator Cohen).

OPENING STATEMENT OF SENATOR ROTH

Senator ROTH. The Subcommittee will please come to order.

This morning, the Permanent Subcommittee on Investigations
continues to fulfill its mandate of presenting to Congress and to the
American people the changing face of organized crime in the Unit-
ed States. Today we will examine the currently emerging threat
posed by Russian organized crime here in America.

Over its long history, this Subcommittee has been at the fore-
front of exposing the dangers posed by organized crime groups op-
erating within our borders, including Colombian and Asian crimi-
nal organizations. We found that the spotlight of exposure and the
glare of public scrutiny are among our most effective weapons
against these resourceful and resilient groups, which operate most
effectively in the netherworld of secrecy, fear and intimidation.

We can be particularly effective if we can expose an organized
group in its early stages, and that is why we are here today.
Through experience, we know how hard it is to dislodge any crimi-
nal group once it has become entrenched in legitimate businesses
and its members assimilated into American communities.

(1)

It may be useful to begin with a short geography lesson. When
we used the term "Russian organized crime" in the course of this
hearing, we are referring to organized crime from all the republics
of the former Soviet Union, not only from the Republic of Russia.
We realize the limitations of this definition but have chosen to use
this phrase because of its widespread recognition and acceptance.

I also want to make clear that the vast majority of former Soviet
citizens currently residing in America are law-abiding, hard-work-
ing and extremely productive members of our society. In fact, these
are the people who are most often the victims of this criminal ac-
tivity. Like most other international organized crime groups, those
from the former Soviet Union start out by preying primarily on
their own ethnic communities in the United States.

The fact that former Soviet emigres to this country suffer dis-
proportionately at the hands of criminals who are their former
countrymen leads, unfortunately, to an often unspoken but never-
theless widely held point of view, namely, that because former So-
viet citizens are most often the victims of these crimes, the rest of
us need not concern ourselves with this problem.

I categorically reject that view. First, all residents of our Nation
are entitled to protection no matter what their backgrounds. Sec-
ond, if we have learned anything from our previous investigations,
it is that all organized criminals, whatever their ethnic origin,
eventually extend their greedy tentacles beyond their native com-
munities into American society as a whole in a never-ending reach
for more money, power and influence.

Russian organized crime presents a textbook example of what I
have referred to as "the new international criminals"; they are a
breed set apart from traditional organized crime. Despite having
roots that can be traced back to earlier times, criminals from the
former Soviet Union have thrived by adapting to and exploiting
modern technology. They have created global communication net-
works through the use of satellite telephones, cellular clone phones
and encrypted fax machines.

Combined with relaxed travel restrictions and a greatly in-
creased volume of international trade, these developments have al-
lowed criminal organizations based in one country to extend their
operations throughout the world. Russian organized crime in par-
ticular conducts complex fraud schemes, traffics in narcotics, prac-
tices extortion, and even commits murder without regard to inter-
national borders.

And in this country, Russian organized crime has undergone a
profound transformation over time. In the 1970's and 1980's, the
Russians who came to the United States were predominantly reli-
gious refugees and those posing as such in order to gain entry. The
criminal ways some of these Russians followed once they arrived
largely involved white collar offenses such as fuel tax and insur-
ance fraud schemes.

The breakup of the former Soviet Union resulted in a new wave
of emigres which, as we will hear today, includes hardened crimi-
nals more prone to violence. It also includes criminals who operate
with others across oceans and borders. Following modern inter-
national business practices, Russian organized crime is forming
working relationships with other international organized groups.

For example, working with Asian organized crime groups, Rus-
sian criminals are smuggling heroin, which is relatively cheap and
plentiful in the former Soviet Union, to the United States. Like-
wise, working with Colombian drug traffickers, Russian organized
crime is brokering deals in the United States to ship Colombian co-
caine to Europe and the former Soviet Union, where it is expensive
and hard to come by — your classic win-win deals for both parties.

Russian hit men, unknown to American law enforcement, are
suspected of traveling to the United States to do contract killings
and then disappearing after the job is done. Money made from ille-
gal enterprises in the former Soviet Union is easily moved out of
the country and laundered throughout the world to conceal its
criminal origins.

Organized crime clearly has become an international problem,
and Russian organized crime is the latest example. No longer can
we think of this as a domestic problem that any single Nation is
capable of solving on its own. International problems require inter-
national solutions. For too long, the international borders that
these criminals routinely ignore have served as obstacles for law
enforcement. We must work together as nations to overcome these
obstacles instead of allowing criminals to use them as gateways to
freedom.

Imagine Bonnie and Clyde gone international — because that is
exactly what is happening. In the 1920's, bank robbers figured out
that by using automobiles to rob banks, then quickly crossing State
lines, they could evade the jurisdiction of State and local law en-
forcement. It was no wonder that a rash of interstate bank robber-
ies soon followed. We eventually solved this problem by enacting a
Federal bank robbery statute.

Solutions to the problems posed by Russian and other new inter-
national criminal groups are neither as obvious nor as easily en-
forceable. No single international low enforcement agency exists to
assume jurisdiction. And while law enforcement agencies have
made great strides and established formal, bilateral cooperative
agreements and informal working relationships, there remains
much to be done to enable law enforcement throughout the world
to obtain information, locate documents, accomplish service of proc-
ess, and extradite criminals.

Further, there are still nations that effectively serve as sanc-
tuaries for these new international criminals. We must work to
eliminate any safe haven where these criminals can hide.

Today we will hearing a comprehensive overview fi'om the Cus-
toms Service, FBI, and the Internal Revenue Service regarding
Russian criminal activity in the United States. In addition, we are
privileged to hear from an official from the Russian Interior Min-
istry who will discuss the steps taken by both of our nations' law
enforcement agencies to facilitate increased cooperation on this
issue.

We will hear from insider witnesses who will give us unique per-
spectives on the nature of Russian criminal activity in the United
States as well as its interaction here with traditional organized
crime.

Finally, we will hear today from those who are our first line of
defense in dealing with this and all of our organized crime prob-

lems, our Nation's local police officers. These officers all serve in
areas beset by criminals from the former Soviet Union and will
give us the benefit of their firsthand experience in dealing with
this threat.

One of the reasons why this Subcommittee has been able to con-
duct these complex investigations so effectively is our ability to
work together without regard to partisan politics. Today's hearing
is no exception. It is the product of a joint investigation conducted
by the majority and minority staffs working together on this most
important issue.

[The prepared statement of Senator Roth follows:]

PREPARED STATEMENT OF SENATOR ROTH

The Subcommittee will come to order.

This morning, the Permanent Subcommittee on Investigations continues to fulfill
its mandate of presenting to the Congress and to the American people the changing
face of organized crime in the United States. Today, we will examine the currently
emerging threat posed by Russian organized crime here in America.

Over its long history, this Subcommittee has been at the forefront of exposing the
dangers posed by organized crime groups operating within our borders, including
Colombian and Asian criminal organizations. We have found that the spotlight of
disclosure and the glare of public scrutiny are among cur most effective weapons
against these resourceful and resilient groups, which operate most effectively in the
netherworld of secrecy, fear and intimidation.

We can be particularly effective if we can expose an organized crime group in its
early stages, and that is why we are here today. Through experience, we know how
hard it is to dislodge any criminal group once it has become entrenched in legiti-
mate businesses and its members assimilated into American communities.

It may be best to begin with a short geography lesson. When we use the term
"Russian organized crime" during the course of this hearing, we are referring to or-
ganized crime from all of the republics of the former Soviet Union, not only from
the republic of Russia. We realize the limitations of this definition, but have chosen
to use this phrase because of its widespread recognition and acceptance.

I also want to make clear that the vast majority of former Soviet citizens cur-
rently residing in America are law-abiding, hard-working and extremely productive
members of society. In fact, these are the people who are most often the victims of
this criminal activity since, like most other international organized crime groups,
those from the former Soviet Union start out by preying primarily on their own eth-
nic communities in the United States.

The fact that former Soviet emigres to this country suffer disproportionately at
the hands of criminals who are their former countrymen leads, unfortunately, to an
often unspoken, but nevertheless widely held view that, because former Soviet citi-
zens are most often the victims of these crimes, the rest of us need not concern our-
selves with this problem. I categorically reject that view.

First, all residents of our Nation are entitled to protection, no matter what their
background. Second, if we have learned anything from our previous investigations,
it is that all organized criminal groups, whatever their ethnic origins, eventually ex-
tend their greedy tentacles beyond their native communities into American society
as a whole in a never-ending reach for more money, power and influence.

Russian organized crime presents a textbook example of what I have referred to
as "the new international criminals." They are a breed set apart from "traditional"
organized crime. Despite having roots that can be traced back to Tsarist times,
criminals from the former Soviet Union have thrived by adapting to and exploiting
modern technology. They have created global communications networks through the
use of satellite telephones, cellular clone phones, and encrypted fax machines. Com-
bined with relaxed travel restrictions and a greatly increased volume of inter-
national trade, these developments have allowed criminal organizations based in
one country to extend their operations throughout the world. Russian organized
crime, in particular, conducts complex fraud schemes, traffics in narcotics, practices
extortion and even commits murder, without regard to international borders.

In this country, Russian organized crime has undergone a profound trans-
formation over time. In the 1980's, Russians emigres who came to the United States
were predominantly religious refugees and those posing as such in order to gain
entry. The criminal ways some of these Russians followed once they arrived largely

involved "white collar" offenses such as fuel tax and insurance fraud schemes. The
break-up of the former Soviet Union resulted in a new wave of immigrants, which,
as we will hear today, includes hardened criminals, more prone to violence. It also
includes criminals who operate with others across oceans and borders.

Following modern international business practices, Russian organized crime is
forming working relationships with other international organized groups. For exam-
ple, working with Asian organized crime groups, Russian criminals are smuggling
heroin, which is relatively cheap and plentiful in the former Soviet Union, into the
United States. Likewise, working with Colombian drug traffickers, Russian orga-
nized crime is brokering deals in the United States to ship Colombian cocaine to
Europe and the former Soviet Union, where it is expensive and hard to come by —
your classic "win, win" deals for both parties.

Russian hit men, unknown to American law enforcement, are suspected of travel-
ing to the United States to do contract killings and disappearing after the job is
done. Money made from illegal enterprises in the former Soviet Union is easily
moved out of the country and laundered throughout the world to conceal its criminal
origins.

Organized crime clearly has become an international problem and Russian orga-
nized crime is the latest example. No longer can we think of this as a domestic prob-
lem that any single nation is capable of solving on its own. International problems
require international solutions. For too long, the international borders that these
criminals routinely ignore have served as obstacles for law enforcement. We must
work together as nations to overcome these obstacles, instead of allowing criminals
to use them as gateways to freedom.

Imagine Bonnie and Clyde gone international — because that is exactly what is
happening. In the 1920's, bank robbers figured out that by using automobiles to rob
banks and then quickly cross State lines, they could evade the jurisdiction of State
and local law enforcement. It was no wonder that a rash of interstate bank robber-
ies soon followed. We eventually solved this problem by enacting a Federal bank
robbery statute. Solutions to the problems posed by Russian and other new inter-
national criminal groups are neither as obvious nor as easily enforceable.

No single international law enforcement agency exists to assume jurisdiction.
While law enforcement agencies have made great strides and established formal, bi-
lateral, cooperative agreements and informal working relationships, there remains
much to be done to enable law enforcement throughout the world to obtain informa-
tion, locate documents and accomplish service of process. Further, there are still na-
tions that effectively serve as sanctuaries for these new international criminals. We
must work to eliminate any safe haven where these criminals can hide.

Today, we will receive a comprehensive overview from the Customs Service, the
FBI, and the Internal Revenue Service regarding Russian criminal activity in the
United States. In addition, we are privileged to hear from an official of the Russian
Interior Ministry, who will discuss the steps taken by both of our nations' law en-
forcement agencies to facilitate increased cooperation on this issue.

We will also hear from insider witnesses who will give us unique perspectives on
the nature of Russian criminal activity in the United States, as well as its inter-
action here with traditional organized crime.

Finally, we will hear today from those who are our first line of defense in dealing
with this, and all of our organized crime problems — our Nation's local police officers.
These officers all serve in areas beset by criminals from the former Soviet Union
and will give us the benefit of their first-hand experience in dealing with this
threat.

One of the reasons why this Subcommittee has been able to conduct these com-
plex investigations so effectively is our ability to work together without regard to
partisan politics. Today's hearing is the product of a joint investigation conducted
by the Majority and Minority staffs working together on this most important prob-
lem. I would like to commend my colleague. Senator Nunn, the Subcommittee's
Ranking Member, and his staff for their cooperation in conducting this investiga-
tion. In spite of the many organized crime hearings we have done together, there
always seems to be a new group emerging that requires the Subcommittee's atten-
tion.

The demise of the Cold War did not spark the first flickers of Russian organized
crime. But it created unprecedented opportunities to fuel its growth. The expansion
of Russian organized crime in the United States poses challenges we ignore at our
peril. We cannot allow our past successes against traditional organized crime to lead
to complacency in dealing with these new international criminals. For, although the
faces change, the threat remains the same.

Senator ROTH. I would now like to call on my friend and col-
league, the distinguished Senator from Connecticut.

OPENING STATEMENT OF SENATOR LIEBERMAN

Senator LlEBERMAN. Thank you, Mr. Chairman.

As you know, Senator Nunn will be here shortly; he is attending
a funeral this morning, and I know he would want to second, and
undoubtedly will, the nonpartisan way in which this Permanent
Subcommittee on Investigations has gone forward with its work,
and I thank you for that. As you said at the beginning of your
statement, this Subcommittee has played an historic role in Amer-
ica in focusing public attention on organized crime at the various
stages of its evolution, and it is in that sense that this hearing this
morning I think is particularly important and will be helpful to the
Congress, to the American people and to law enforcement agencies
throughout our country.

As your statement indicated, the new face of organized crime,
which in this case is covered by the generic term, "Russian orga-
nized crime," is a combination of the worst of the old and the worst
of the new in the sense that this new generation of organized
criminals is as capable as any of their predecessors of emplo3dng
the worst forms of violence and brutality and of preying on people's
weaknesses and terrorizing people through force. But it is the
worst application of the new in the sense that it employs most of
the instruments of the new technological information age to
achieve its evil purposes. And one of those capacities which is
greater than existed for old organized crime is the ability to very
quickly and effectively operate internationally, with all the implica-
tions that has.

Clearly, one of the implications that worries many of us — and it
is not conventional organized activity — is the extent to which orga-
nized criminal groups including the Russian groups may conduct
activities that spill over into not just our concern about domestic
security, which is to say law and order, security from crime here
at home, but the extent to which they may spill over into inter-
national security, and particularly on the question of whether they
are involved at all or there is a danger that they will be involved
in the smuggling or misappropriation of weapons of mass destruc-
tion that may be in the possession of the Russian Government
today.

This is a very important hearing, and you have assembled an ex-
traordinarily impressive and relevant group of witnesses. I thank
you, Mr. Chairman, for your great leadership in this effort, and I
look forward to the hearing today.

Senator ROTH. Thank you, Senator Lieberman.

It is now my pleasure to call on my good friend. Senator Cohen.

OPENING STATEMENT OF SENATOR COHEN

Senator Cohen. Thank you, Mr. Chairman. You gave a very com-
prehensive opening statement, and I will not try to improve upon
that, other than asking permission to insert my full statement in
the record, and I will just make a few comments.

The Chairman has talked about the increased violence that is
taking place on the part of criminal gangs operating in the former

Soviet Union, but who now also operate gangland fashion here in
the United States. One issue that we certainly have to be con-
cerned with is the level of violence that these groups will engage
in to intimidate and extort and simply instill an overwhelming
sense of fear on the part of both American citizens and non-Amer^
ican residents here in the United States. That is one aspect that
we have to be very concerned about.

As the Chairman has indicated, however, gang activity has
moved into the white collar criminal aspects as well. When we talk
about white collar crime, we tend to think that this is really only
a question of money. What I would like to say this morning, Mr.
Chairman, is that it is not only your money, but it is your life in
some particular cases.

By way of example, this Subcommittee in cooperation with the
Senate Aging Committee has been conducting investigations into
health care fraud, and we have worked very closely with the FBI
to develop legislation that will help combat health care fraud. One
case comes to mind — and we had the FBI testify about this situa-
tion — where two brothers from Lithuania set up what we call a
"rolling lab" in Southern California, and this "rolling lab" scheme
operated across the country in areas like St. Louis, Chicago, Flor-
ida, as well as Southern California.

They would send out inducements for local residents to come by
and have a medical examination at no cost, or at a greatly reduced
cost. What happened as a result of this "rolling lab," which was
performing tests in unsanitary and unsafe conditions, is that they
were leading those who were having the tests performed to believe
they were being performed by adequate, competent medical person-
nel. However, certain symptoms which were diagnosed were never
followed up on, so those unsuspecting individuals who were coming
forward to go into this "rolling lab" were under the impression, if
no negative results came back, that they were in perfect health,
which was not the case. So, in a number of cases, individuals who
had serious problems went completely untreated.

The converse was also true, that some individuals who were com-
pletely healthy had reports filed indicating that they were suffering
from serious diseases which caused their insurance companies to
cancel their insurance even though they were in perfect health.

So we had a situation in which $1 billion was extracted from our
health insurance companies as such, with one company haying to
operate in the red for a period of 2 years as a result of this type
of activity.

So it is not only your money that is being extorted or taken; it
could be your life, as a result of these organized crime activities.

So Mr. Chairman, as you pointed out, they are very complicated,
they are very sophisticated, and the face of evil wears many dis-
guises. I am not sure in what stage the Russian organized crime
activities in this country are at — it could be the larval stage, or it
might be much more evolved as far as its establishment, taking
root in this country in cooperation, as the Chairman said, with
other organized criminal groups. But they now have woven a web
of international proportions and dimensions which may be far more
evolved than we have any notion of right now.

So I look forward to the testimony, Mr. Chairman, and I want
to commend the Subcommittee staff in particular for the enormous
amount of work that they have done to prepare for this hearing.

Senator Roth. Thank you, Senator Cohen, and I would just like
to publicly acknowledge what an outstanding job you have done in
the area of medical fraud in developing legislation to address it. I
have been pleased to work with you on that critically important
matter.

I would say to all of our witnesses that we will, of course, enter
your full statements into the record, as we will do in the case of
your opening statement, Senator Cohen.

[The prepared statement of Senator Cohen follows:]

PREPARED STATEMENT OF SENATOR COHEN

Mr. Chairman, I am pleased to participate in today's hearing on the rise of Rus-
sian organized crime in the United States and I would like to commend you and
the ranking member, Senator Nunn, for your longstanding, bipartisan efforts to in-
vestigate organized crime here in the United States and around the world.

As I stated 2 years ago at another PSI hearing on international organized crime,
a battle is being waged on the streets of St. Petersburg, Moscow, Warsaw and Kiev
between the rule of law and the rule of the gun. President Yeltsin said that orga-
nized crime threatened the foundation of Russian society. Because of the increase
in shootouts among rival gangs over dividing the spoils, Moscow had been compared
to Chicago during prohibition. Unfortunately, as we will hear today, gangland
shootings are on the rise not only there but on our streets as well.

There now is evidence that criminal operatives from Russia and from the other
former Soviet republics have come to the United States. Presently, Russian/Eur-
asian criminal groups are engaged in a myriad of criminal activities here in the U.S.
including: fuel tax fraud, medical and insurance fraud, staged automobile accidents,
extortion, loan sharking, drug trafficking, credit card forgery, counterfeiting, auto
theft, prostitution and murder.

As the author of the enhanced health care anti-fraud penalty provisions that
passed in Budget Reconciliation last year, and which are now pending in the Kasse-
baum/Kennedy health insurance reform bill, I have been particularly active in inves-
tigating health care fraud in the U.S. Federal and State programs, and in private
health care plans. One of the most pernicious medical fraud schemes uncovered in
recent times involved a scam referred to as the "rolling lab" case. Two brothers, Mi-
chael and David Smushkevich, who were emigres from Lithuania and who were part
of Russian organized crime, created a fraud ring which ran mobile diagnostic testing
labs and clinics in Southern California, St. Louis, Chicago, and Florida. This scheme
defrauded private and government health insurers of approximately $1 billion.

Patients were lured to clinics or sites serviced by mobile vans for comprehensive
physical examinations with bogus claims of "state of the art" testing offered "free
of charge" or at a nominal cost to the patient. Billings for nonexistent services, false-
ly inflated billings, or billings for unnecessary services provided the basis of the
scheme.

The impact of this scheme was so drastic that one insurer operated in the red
for two consecutive years as a result of the fraudulent claims. Moreover, the health
of patients was jeopardized by the slipshod examinations and failure to obtain prop-
er medical histories. These scam artists did not properly follow up on abnormal
symptoms and test results, leaving those patients who actually suffered from serious
medical problems with a false sense of security. The perpetrators often administered
tests under unsafe conditions, performing cardiac stress tests without proper resus-
citation equipment and, at times, without a doctor present.

Some patients even had their health coverage jeopardized when their insurers re-
ceived medical claims falsely reporting that the patient suffered from serious "pre-
existing medical conditions" that, in fact, did not exist at all. Legitimate medical
providers were also damaged when the perpetrators stole their taxpayer identifica-
tion numbers for use in submitting claims.

The rolling lab case is not an isolated example. The health care system is built
on a foundation of trust and therefore can be easy to defraud. An investigation of
health care fraud that I have conducted through the Special Committee on Aging
identified cases of Russian criminals going into their own communities to induce
Medicaid recipients with gifts such as angora undergarments and television sets in

order to obtain the use of their cards for the purpose of bilHng unnecessary supplies
to insurance carriers.

Our investigation also identified staged accident rings in which phony medical
clinics have been set up in order to submit false claims for unnecessary treatments.
In some instances, phony law firms using figurehead attorneys have been set up to
further this scheme.

As Russian organized crime groups have become more active in the United States,
incidents of violence related to their operations here have become more frequent.
For example, according to the FBI, in 1993 the body of a former Soviet from Odessa
was found with multiple shot wounds in the head. He had been the president of a
purported brokerage firm specializing in the exporting of American goods to Russia.
In actuality, he was suspected of being a high-ranking organized crime figure who
had been the target of two earlier murder attempts the year before.

In another case, the body of a Russian emigre was found at JFK airport in New
York. This individual had been kidnapped in Brooklyn the month before. He had
allegedly been involved in fraud activities and had been shot in the head four times.
Another violent incident involved the shooting of a Russian in a wholesale gasoline
company in the Sheepshead Bay area of Brooklyn. He was shot multiple times by
a man using a submachine gun. This Russian casualty had previously been indicted
on charges relating to the use of fraudulent credit cards.

Although some will argue that we are only witnessing the early stages of a crimi-
nal enterprise, it is clear that Russian/Eurasian organized crime is on the rise in
both white collar crimes and violent acts. Some in law enforcement believe that they
will eventually compare equally to more traditional organized crime groups, such as
Italian criminal groups and Colombian trafficking organizations, in terms of inter-
national capabilities. As we will hear from today's witnesses, unlike these better-
established criminal groups, who are primarily involved in drug trafficking and re-
lated money laundering in the United States, the Russian criminal enterprises are
heavily involved in a wide range of fraud and economic crime in the United States.

In conclusion, I stated almost 2 years ago that failure to cooperate on an inter-
national level would have dire consequences. We in the United States and western
Europe would be faced with the consequences of a failure to address the criminal
situation in Russia as their operations would spread further to our shores. As we
will hear today, unfortunately that is no longer just a statement of warning since
Russian crime has not only arrived at our shores but is spreading across our entire
country. I look forward to hearing today's testimony.

Senator RoTH. We do have a lot of witnesses here to testify
today, so it would be appreciated if each of you would summarize
your written testimony in approximately 10 minutes to allow time
for questions and answers.

Our first witnesses are a panel of American and Russian law en-
forcement officials. We are very pleased to welcome the Commis-
sioner of the U.S. Customs Service, George Weise; Jim E. Moody,
Deputy Assistant Director of the Criminal Investigative Division of
the Federal Bureau of Investigations; Edward Federico, Director of
Criminal Investigations of the National Operations Division of the
Internal Revenue Service; and finally, we are particularly pleased
to welcome Igor Kozhevnikov, who is Deputy Minister of the Rus-
sian Ministry of Interior Affairs.

Mr. Minister, I want to extend the Subcommittee's welcome and
appreciation for your appearing before us this morning.

For everyone's convenience, we have simultaneous interpretation
equipment available for the Minister's testimony. Channel 1 on the
handset will be broadcast in English, and Channel 2 will be broad-
cast in Russian.

Now, I would say to our witnesses it is the practice that we
swear in all witnesses who appear before the Subcommittee, so I
would ask that each of you rise and raise your right hand.

Do you swear or affirm that the testimony you will give before
this Subcommittee is the truth, the whole truth, and nothing but
the truth, so help you, God?

Mr. Weise. I do.

Mr. Moody. I do.

Mr. Federico. I do.

Mr. KOZHEVNIKOV. Yes.

Senator ROTH. Thank you, and please be seated.

We will begin with the testimony of Commissioner Weise.

Commissioner Weise?

TESTIMONY OF GEORGE J. WEISE,i COMMISSIONER, U.S.
CUSTOMS SERVICE

Mr. Weise. Thank you, Mr. Chairman, and good morning to all
of you. It is a real pleasure to be here this morning to have an op-
portunity to thank this Subcommittee for the continuing support
you have provided to the U.S. Customs Service.

My purpose today is to outline the current threat to the United
States from Russian organized crime, which continues to expand its
operations into this country, and to discuss the part the U.S. Cus-
toms Service is playing to meet this very serious challenge.

In 1996, customs administrations around the world are reporting
a new wave of criminal activity, new variations of money-launder-
ing and drug-smuggling schemes, and a significant increase in com-
mercial fraud. This new threat is real, and it is immediate. Its
source is Russian-Eurasian organized crime, and at U.S. Customs,
we have every reason to believe that the danger posed by this
criminal organization will quickly increase in both size and scope
unless law enforcement agencies such as ours undertake the con-
struction of a strong and effective counter-offensive.

The fall of the Berlin Wall in 1989 and the subsequent collapse
of the former Soviet Union have had critical consequences for the
international community, which suddenly found itself dispossessed
of the safeguards and formal agreements that had regulated the
production, use, storage and disposition of nuclear materials and
other weapons of mass destruction in the former Soviet Union.

For international organized crime groups and terrorist organiza-
tions around the world, the sudden dissolution of the former Soviet
Union translated into an unprecedented free-for-all, one that of-
fered access almost overnight to a vast supermarket of conven-
tional weapons, weapons of mass destruction and their components.

This same upheaval also presented the international underworld
with unparalleled opportunities to devise and deploy criminal
schemes which not only support but even extend the capabilities
and goals of international drug smugglers, money launderers and
illegal arms traffickers. It is these subsidiary schemes and new op-
portunities that are now testing the resolve and the ingenuity of
the U.S. Customs Service.

At Customs, we believe this challenge demands a clear and un-
equivocal response. Today we have an uncertain and changing geo-
political situation, and Russian organized crime groups are infil-
trating this Nation's commercial and economic institutions with
amazing speed.

Our larger objectives are ones which we share with other law en-
forcement agencies at home and abroad. We believe it is imperative

* The prepared statement of Mr. Weise appears on page 100.

to prevent weapons of mass destruction from falling into the hands
of outlaw nations, organized crime groups or terrorist bands inter-
ested in orchestrating catastrophic attacks.

We believe it is necessary to employ the collective skills of U.S.
law enforcement to ensure that organized crime does not subvert
early efforts in Russia to introduce and sustain democracy, and we
believe that we must act now to prevent the further entrenchment
of Russian organized crime in the United States.

The growth of Russian organized crime groups in the United
States mirrors their emergence in countries around the world.
Many of the organized crime groups in the new republics are
known to be associated with each other and have worked together
in the past.

The criminal groups that constitute the organizations we have
labelled Russian and Eurasian organized crime are themselves
comprised of emigres from the former Soviet Union. These groups
function as parts of an international network that has well-known
ties to the Colombian cartels, to the Italian mafia, to Israeli orga-
nized crime, and to other international crime groups.

While criminal cells or networks now operating in the United
States have been called, among other things, "the Russian mafia,"
unlike the traditional mafia, Russian organized crime is relatively
unstructured; there is no well-established criminal hierarchy or
firm chain of command. This absence of what has typically been an
identifying feature for international criminal syndicates frequently
makes it difficult for law enforcement agencies to tie specific crimi-
nal activities to Russian organized crime. Despite this difficulty,
U.S. Customs does have the intelligence, information and evidence
we need to identify Russian organized crime as the perpetrator in
a number of dramatic cases.

These cases involve narcotics smuggling, money laundering and
commercial fraud — all crimes which fall within our jurisdiction.

Since 1991, Customs has investigated approximately 82 cases in-
volving Russian-Eurasian organized crime. With your permission,
Mr. Chairman, I would like to take a few minutes now to outline
three Customs cases that were generated by Russian organized
crime which we think illustrate the dangers posed by this criminal
syndicate.

Before I begin, however, I want to point out that the U.S. Cus-
toms Service does not investigate organized crime per se. We go
after individual crimes, and the cases I am about to discuss dem-
onstrate the ways in which Russian organized crime is triggering
Customs investigations.

In June 1991, New York Customs agents initiated an investiga-
tion into possible heroin smuggling activities by Russian organized
crime. The investigation had been triggered by the arrest of two
Russian couriers who had arrived at JFK International Airport
with 3,209 grams of heroin secreted in "body girdles," or what used
to be called a "smuggler's vest" — something that looks sort of like
this — it wraps around the midsection, and the drugs are contained
therein.

As the investigation unfolded, it became clear that we were deal-
ing with an extensive network of heroin couriers, Russian and
former Russian nationals, who were entering the United States via

New York and Boston on a bimonthly basis. In the end, Customs
succeeded in dismanthng a heroin smugghng operation that em-
ployed enough couriers and possessed enough heroin to supply the
entire East Coast of the United States. And what you see here is
pretty much a schematic of the involvement of this organization,
where the drugs originated in Bangkok, Thailand, and all of the
complex entry points. ^

The 5-year investigation provided tremendous insight into the in-
sular world of drug trafficking by the former Soviet Union criminal
enterprises and illustrated how complex an investigation can be-
come when U.S. law enforcement agencies face unfamiliar or unan-
ticipated barriers created by a different culture and language.

This joint Customs-DEA investigation concluded in 1995 with the
convictions of 14 defendants and the seizure of approximately 6,000
grams of heroin.

The second case I want to highlight today involves the illegal ex-
port of stolen cars by FSU emigres. A good American car is selling
anywhere from 2 to 3 times its value in the former Soviet Union.
The current cars of choice are 4-wheel drive vehicles, and as far as
we can tell, the demand for these vehicles and for other models, for
Mercedes, Jaguars and Oldsmobiles, remains high.

In this instance, our Customs investigation began with a tele-
phone call from Latvian Customs to our attache in Bonn, Germany.
Latvian Customs was requesting information about four American
vehicles they had seized on their border with Belarus. Our attache
in Bonn contacted our domestic office with the information passed
on to him by the Latvians. The cars had been stolen in New York
and driven to Chicago. In Chicago, these vehicles were secreted be-
hind false walls — and you can see them depicted in these pic-
tures — in containers that were filled with mattresses and boxes of
what were listed in our Customs forms as "ordinary household
goods." It is not very visible here, but in one instance, you can ac-
tually see that the license plate is still on the vehicle. ^

The criminals who stole these American cars attempted to export
them illegally from the United States and moved so quickly that
the license plate is still visible. The one thing I would say is that
if anyone happens to be missing a Porsche with New York vanity
plates reading "ONTHEBID," you can contact us after the hearing,
and we will see if we can match you up with the vehicle.

Senator Roth. Do you have any estimate of how many cars are
involved in this kind of operation?

Mr. Weise. Yes. We can give you total numbers.

Mr. Macisco. For Russian organized crime, Mr. Chairman, ap-
proximately $25 million worth of automobiles, and we have made
77 arrests involving Russian organized crime exporting cars ille-
gally from the United States.

Senator ROTH. Thank you.

Mr. Macisco. The vehicles were worth approximately $30,000
apiece on average.

Mr. Weise. A number of arrests have been made in this case, in-
cluding the organizer and leader of this group, who was once the

^The document referred to was marked Exhibit No. 1 and can be found on page 73.
2 Pictures referred to appear on pages 116 and 11700.

bodyguard for Monya Elson, a notorious organized crime figure in-
volved in the import and distribution of heroin in New York. This
former bodyguard had been shot and wounded in New York after
breaking ranks with Elson, and he subsequently fled to Chicago.

It is important, however, to understand that despite the occa-
sional disagreements between the leaders of the Russian syndicate,
they continue to mount a unified effort to create a criminal system
in which various activities, drug smuggling, illegal exports, money
laundering, reinforce one another and feed the emerging Russian
criminal cartel.

So far, as was just indicated, U.S. Customs has recovered stolen
vehicles, luxury cars, and construction equipment valued at more
than $25 million. We have also made 77 arrests with regard to this
type of criminal activity.

The last case I would like to brief you on, Mr. Chairman, focuses
on the kind of investigation that Customs does into the illegal sale,
export and diversion of weapons and their components. While Cus-
toms has not yet discovered a direct link between these investiga-
tions and Russian/Eurasian organized crime, I want to touch on the
case I am about to describe for two reasons — first, because I think
it illustrates the wide range and international scope of the cases
that Customs is called on to investigate, and second, because I
think this case documents a criminal scenario that is inherently at-
tractive to organized crime groups and which as such may be
adopted at any time by Russian organized crime.

The Customs case originated with our resident agent-in-charge,
our RAC office in Newark, and our success was due largely to the
efforts of Special Agent Eric Caron, who is standing to my right,
who began the investigation with one small piece of seemingly in-
significant information and carried it to a successful conclusion.

The investigation involved a Newark, New Jersey-based com-
pany, Electrodyne Systems, which was defrauding the United
States Department of Defense by importing Russian-made avionics,
satellite communications, radar and radio components, and selling
the equipment to the United States under military contracts as
U.S. -made parts and equipment.

Two defendants, who are emigres from Russia and Iran, have
been indicted for allegedly defrauding the Department of Defense.
In addition to the fraudulent imports, the United States company
was exporting U.S. defense technology, blueprints and designs to
Russia and Ukraine without an export license, so that companies
there could manufacture the avionics and equipment to U.S. speci-
fications.

Interestingly enough, this was the first instance where Customs
has focused on the illegal export of blueprints and designs as op-
posed to the export of actual items or equipment. As you know,
U.S. defense contracting regulations prohibit the manufacture of
U.S. weapons systems components by overseas companies, and for
good reason.

Foreign companies that manufacture equipment frequently ob-
tain classified plans and information, and in situations where these
foreign companies may be front companies for organized crime, ter-
rorist organizations or pariah states, the consequences may be far-
reaching.

As far as we can tell, in this case our interests were compromised
to the extent that the Department of Defense, specifically the Unit-
ed States Navy, might have lost millions of dollars by purchasing
substandard product components intended for installation within
our national defense systems if Customs had not stepped in.

The real danger in this instance, however, turns on the potential
risk, on the possibility that the Russian companies that manufac-
tured the components for which our Government had contracted
might have used or sold the classified specifications sent to them
by the U.S. contractor to terrorist or pariah states.

In this case, we cannot be certain that the classified information
and specifications forwarded to Russia and the Ukraine were not
passed on to other individuals or organizations. Moreover, we also
know that it is possible if one has this information to reconstruct
a prototype of our classified defense systems based on the analysis
of a single component.

This particular case involved smuggling, violations of U.S. export
control laws, and commercial fraud, all of which placed it firmly
within our Customs jurisdiction. At Customs, we believe that we
have a responsibility in this country to erect the kinds of safe-
guards and enforcement mechanisms that will preclude foreign
manufacturers fi-om obtaining what now appears to be easy access
to classified information, plans and blueprints for technology criti-
cal to the national security of the United States.

The risks that I am outlining today, Mr. Chairman, remain inter-
national in their dimensions and impact, and they will continue to
require a high level of cooperation and mutual assistance. Cur-
rently, the U.S. Customs Service has Customs Mutual Assistance
Agreements with 26 nations. These are agreements we entered into
to share information and to work cooperatively with our counter-
parts in these foreign countries. Since 1992, relations with the
State Customs Committee of the Russian Federation have been
greatly expanded and intensified. A new Customs Mutual Assist-
ance Agreement was concluded in 1994 and signed during a sum-
mit meeting between Presidents Clinton and Yeltsin in September
of that year. The Director General of Russian Customs, his senior
staff, and the 12 directors of the regional customs administrations
have all visited the United States, and several reciprocal visits
have occurred or are being planned.

Russian Customs sent representatives to our Seminar on Nuclear
Smuggling in September of 1995, and they also sent representa-
tives to a U.S. -Russian Preventive Enforcement Technical Work-
shop in March of this year.

Our working relationship with Russian Customs is expected to
grow significantly with the opening of an office in Moscow later
this year, and we believe that the involvement of Russian Customs
in our nonproliferation interdictions and investigations is critical to
our future success. Both sides view such work as a national prior-

ity.

We are also providing a significant level of training and other
relevant assistance to Russian Customs. Last September, U.S. Cus-
toms conducted a Train-the-Trainer program in St. Petersburg,
Russia. The objective of this program was to further develop Rus-
sian Customs training infrastructure by increasing the number of

qualified training instructors. This specific course focused on train-
ing related to border interdiction.

As I speak today, another Customs training team is getting
ready to travel to Moscow this weekend in order to conduct a simi-
lar Train-the Trainer course.

Senator ROTH. Mr. Weise, I would ask that you try to summarize
so we can move on to the other witnesses. We will, of course, put
your entire statement in the record.

Mr. Weise. Absolutely, Mr. Chairman.

I would conclude, then, at this point, Mr. Chairman, and I do ap-
preciate the important work the Subcommittee has done. I have no
doubt that with your continuing support and interest, the U.S.
Customs Service can meet the challenge quickly and effectively. We
remain determined, in cooperation with the Departments of Treas-
ury, State, Justice, Defense, Energy, Commerce, the intelligence
community and our foreign counterparts to promote global security
through enhanced border initiatives.

Thank you very much, Mr. Chairman.

Senator ROTH. Thank you, Mr. Weise.

Mr. Moody?

TESTIMONY OF JAMES E. MOODY,i DEPUTY ASSISTANT DIREC-
TOR, CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BU-
REAU OF INVESTIGATION

Mr. Moody. Thank you very much, Mr. Chairman. On behalf of
Director Freeh and myself, I would like to thank you and the Sub-
committee Members for inviting me today.

Concerning Eastern European organized crime, there are some
positive aspects and some negative aspects that we see today. A
positive aspect for the FBI is the fact that we have established
Eastern European crime as a sub-program of the organized crime
program in June 1991. At that time, we began to try to establish
an intelligence base on the problem that was beginning to appear
here in the United States based upon a crime survey that we con-
ducted in late 1990 and early 1991.

The second positive aspect is the relationship we have estab-
lished with European and Eastern European law enforcement to
address this crime problem, for instance, the positive relationship
that we have established with the Russian Ministry of Interior
since February 1993. We are trying to build lines of defense in Eu-
rope for this crime problem that is facing us here in the United
States, and we would like to address the crime problem as far away
from the United States as possible.

We are doing this through liaison relationships with law enforce-
ment in Europe and in Eastern Europe, and we are also doing this
through training exercise that we are doing in Eastern Europe,
based upon money provided by Congress. For instance, in fiscal
year 1995, we trained over 4,400 law enforcement officers in East-
ern Europe.

The negative aspects of the problem, as we see it, are that they
are expanding in the United States and internationally much faster
than we anticipated. The organized crime groups are using inter-

iThe prepared statement of Mr. Moody appears on page 120.

national borders and sovereignty issues for protection in their ille-
gal activities, and this is often quite difficult to overcome.

A second major negative aspect is their ability to network with
other organized crime groups internationally. This makes them one
of the fastest-growing organized crime threats that we have seen.

I have a few charts that I would like to show you today to give
you an example of what we are experiencing here in the United
States. The first chart ^ is actually the results of our census in
1990, which shows you the demographics in the United States of
where we have significant ethnic, Russian and Eurasian popu-
lations. It shows where the majority of the Russian, Eurasian and
ethnic people are situated in the United States, and it comes to
about 2.9 million individuals.

I want to emphasize as the Chairman did this morning that only
a small percentage of any ethnic groups of any nationality is crimi-
nal, and an even smaller percentage can be identified as organized
crime. But historically in the United States, the way that organized
crime comes into our country is that it first establishes itself in its
own ethnic neighborhoods for protection, because they feel com-
fortable, and because they prey upon the other emigres to the Unit-
ed States, and they prey upon the fact that most newcomers into
the United States do not want to come to law enforcement for help;
they have a fear of that.

The next chart ^ I want to show you dramatically shows some dif-
ferent things. For instance, this shows the number of field offices
we have — and field offices are our major offices in the United
States — the number of field offices that we have with ongoing in-
vestigations of Eastern European organized crime. Thirty-six out of
56 of our field offices have ongoing investigations. That is a far cry
from the 68 total investigations that we had identified in our crime
survey back in 1990 and 1991. In fact, at this time, we have 132
ongoing organized crime cases, and we have more than 215 inves-
tigations that we are working with the Russian authorities.

The next two charts ^ will show you the Eastern European orga-
nized crime groups that we have identified here in the United
States, including their leaders. There is a total of 26 of those
groups. Now, I have testified before Congress in the past that we
have more than 30 groups in the United States. This is a new fig-
ure that we are providing today, and it shows you how the problem
is evolving in the United States. Although Eastern European orga-
nized crime is our fastest-growing problem, the evolution of orga-
nized crime from Eastern Europe is still in its infancy stage of mat-
uration. The groups continue to vie for dominance, some groups are
consolidating, and some groups are disappearing.

The last chart "* depicts the Eastern European organized crime
groups that are active in the United States and where they are lo-
cated. The reason why this chart is significantly different from the
one that shows where our field offices are located is kind of un-
usual to me. You will see that they are not really locating in their

^ The document referred to was marked Exhibit No. 6 and can be found on page 84.
2 The document referred to was marked Exhibit No. 7 and can be found on page 85.
^The documents referred to was marked Exhibit No. 8 and can be found on page 86.
^ The document referred to was marked Exhibit No. 9 and can be found on page 88.

ethnic neighborhoods, so this is a change from the historical aspect
of organized crime as we see it here in the United States.

The organized crime groups continue to be involved in their tra-
ditional organized crime activities, such as extortion, protection
rackets, drugs, illegal gambling, arson, and murder. But there is a
second group of individuals that we are facing here in the United
States coming out of Eastern Europe, and we like to describe them
as the "fraudster." Senator Cohen earlier this morning gave the ex-
amples of the "rolling labs" and the Smushkevich brothers. These
are the kinds of "fraudsters" that we are experiencing and are in-
volved very much in economic fraud, insurance fraud, money laun-
dering, health care fraud. Medicare fraud, and fuel excise tax
fraud.

In the United States today, along the East Coast, we have both
traditional Eastern European organized crime activity, and we
have fraud activity, and the fraud activity on the East Coast is pri-
marily economic fraud, money laundering, health care fraud, medi-
cal fraud, and fuel excise fraud.

On the West Coast, we see it a little bit differently. We see more
"fraudsters" in money laundering, economic fraud, fuel excise tax
fraud, drugs and extortion.

In middle America, we see automobile theft, insurance and
health care fraud, extortion and drugs.

There is a mixture between these "fraudsters" and organized
crime groups. Some of the organized crime groups may be involved
in fraud; some of the "fraudsters" may be working independently,
but they are associated with organized crime groups. So this is an
eclectic mix that continues to evolve in the United States.

We also see in Hawaii recently a new phenomenon where there
are lavish vacations going on over there involving a lot of people
coming out of Eastern Europe, spending just thousands and thou-
sands of dollars during their vacations. We see them beginning to
purchase real estate in Hawaii, as we experienced a few years ago
when the Japanese Boryocadan started doing the same thing.

Senator COHEN. Is there any left?

Mr. Moody. They have the money; they keep increasing the
prices.

So in summary, that is what we see occurring here in the United
States. I would again like to thank you for inviting us here today,
and I would be happy to answer any questions later.

Senator Roth. Thank you, Mr. Moody.

Mr. Federico?

TESTIMONY OF EDWARD L. FEDERICO, JR.,i DIRECTOR, NA-
TIONAL OPERATIONS DIVISION, CRIMINAL INVESTIGATION,
INTERNAL REVENUE SERVICE

Mr. Federico. Thank you, Mr. Chairman, Members of the Sub-
committee.

What makes IRS so uniquely qualified and well-studied in this
area is that we have been investigating organized crime and send-
ing high-level organized criminals to jail for over 77 years.

^ The prepared statement of Mr. Federico appears on page 140.

Nearly everyone has heard of the famous Al Capone. While the
Capone investigation was certainly not our largest nor our most
complex, it is a perfect example of what we do. When more conven-
tional investigative techniques fail, we begin to follow the money
trail. The proceeds of crime in our experience always lead to the
criminal.

Special agents' combination of accounting and law enforcement
skills have been essential qualities in conducting investigations
which have led to the conviction of high-profile criminals who com-
mit increasingly sophisticated financial crimes in both legal and il-
legal activities.

Today we are here to address the phenomenon of Russian orga-
nized crime, and as the Chairman so eloquently stated, we are
using the term, "Russian organized crime" to cover a myriad of
groups from the former Soviet Union.

In order to combat organized crime, one must have a thorough
understanding of the criminals involved. This has been particularly
true of our efforts to combat motor fuel excise tax evasion schemes
that have been referenced here this morning.

We have identified some significant characteristics of the Rus-
sian organized criminal in this newly-established criminal enter-
prise. They display a remarkable aptitude for sophisticated white
collar crime. They are ruthless, emplo3dng threats, intimidation
and violence to further their aims. They are very adaptable. They
are not monopolistic. They are very fluid.

These characteristics are particularly true of those individuals
involved in motor fuel excise tax schemes investigated by the IRS.
What started out as a novel fraud scheme contrived on Long Island
quickly evolved into a billion dollar a year compliance problem for
us and for the Nation.

Initially, gasoline was the product of choice. Gasoline excise tax
revenues constitute almost 70 percent of the approximately $20 bil-
lion in motor fuel excise taxes collected annually by our Govern-
ment. To give you an idea of the money involved, an average tank-
er truck holds 8,000 gallons of gasoline. The combined Federal and
State taxes per gallon can exceed 40 cents, so the average tax per
tanker is $3,200.

The complicated "daisy-chain" schemes devised by the Russians
puts that $3,200 per tanker into their pockets instead of into the
pockets of the United States Treasury.

Senator RoTH. May I make sure I understand the correct figure?
The total amount of taxes is $20 billion a year on gasoline?

Mr. Federico. Gas and diesel and other motor fuel; yes, sir.

Senator ROTH. And $1 billion of that is absconded with through
these scams?

Mr. Federico. That is correct.

Senator RoTH. Five percent.

Mr. Federico. Yes, sir. Now, we have made, as I will state later
in my testimony, some very proactive changes to the law that have
corrected the problem.

To say that these daisy schemes are complicated, well-planned
and well-organized would be an understatement; yet they can be
unraveled, and vve have been doing that successfully for the past
10 years. I would like to briefly explain the most prevalent type of

scheme that the organized criminal is using, and that is the daisy
chain.

To briefly demonstrate the complexity of this scheme, I would
like to direct your attention to the chart ^ that has been placed to
your lefl:. The "daisy chain scheme" is the method which was devel-
oped by organized crime expressly for the purpose of stealing Fed-
eral and State fuel excise tax revenue. This scheme capitalizes on
the weaknesses of our motor fuel excise tax law.

In the typical daisy chain operation such as the one depicted on
this chart, which was actually used in a courtroom in Philadelphia,
a complex paper trail of motor fuel transactions was created. At
some point along the chain, the sale was fictitiously invoiced as
tax-paid fuel. But the company supposedly claiming to have paid
the tax turned out to be a fictitious entity, or an entity with no as-
sets. This is what we call the "burn" company, which is the bottom
company reflected on the chart.

By the time the auditors or the investigators unraveled the series
of transactions to determine the true tax liability, the so-called
"burn" company has disappeared without a trace of the records or
the assets.

For such an operation to work, the perpetrator must be able to
purchase and sell fuel tax-free. In the case of the Federal excise
tax, this means having a registration number assigned by the IRS
on a Form 637. Legitimate registration numbers have been ob-
tained for fraudulent purposes by buying out registered companies
or falsifying documents of legitimate companies. Sufllce it to say
that this single particular scheme defrauded the Federal Govern-
ment and the State of Pennsylvania out of $14.8 million.

Another example of the daisy chain scheme was in Newark. We
called this the "Red Daisy" scheme. We used an ambitious under-
cover operation to expose organized crime influence in the fuel
business in New York, New Jersey and Pennsylvania, orchestrated
and executed by Russian emigres under the direction of a tradi-
tional mob boss named Tony Morelli. Morelli was a captain in the
Gambino crime family and was sentenced this year to 20 years in
prison for his leadership role.

The first phase of this 2-part, multi-year investigation focused on
a scheme which defrauded the Federal and State governments of
$60 million in fuel excise taxes. In this scheme, members of the
Russian "mafia" paid tribute to members of New York's organized
crime families, including John Gotti.

Our undercover agents became so influential in the bootleg fuel
industry that mobsters warned them to join their operation; get out
of the business; or suffer the consequences. This threat became re-
ality when the building being operated by the undercover agents
was burned to the ground. This operation was a joint operation
with the FBI and the IRS.

The second indictment of the Red Daisy was announced August
8, 1995. It charged 25 corrupt fuel dealers, along with members of
both traditional and Russian organized crime, with the theft of
over $140 million in Federal motor fuel excise tax revenue. This

1 The document referred to was marked Exhibit No. 10 and can be found on page 89.

case is currently awaiting trial, and we have determined that it is
the largest tax evasion case in our history.

Fuel excise tax hurts not only the Federal and State govern-
ments by depriving them of revenue, but has a profound negative
impact on legitimate fuel distributors and retailers. Their market
shares erode, their profits decline, and some of them are even
forced out of business. They cannot compete with the criminals.

The next chart ^ dramatically illustrates the impact of Russian
organized crime on a particular market segment, in this case the
State of Pennsylvania. Beginning in June 1990, you can see a dra-
matic decline in taxable gallons of diesel fuel reported in the State.
The decline and corresponding loss of revenue was not reversed
until June 1992. The Criminal Investigation Division increased its
efforts to target criminal organizations in major metropolitan areas
at this time. In the fall of 1992, our efforts began to produce dra-
matic results. The evidence gathered was used to obtain warrants
to search hundreds of locations across the Nation.

Literally tons of documents and $15 to $20 million in assets were
seized. The evidence made possible a series of indictments began
in March 1993. ^ But as you can clearly see on the chart, the reve-
nue began to recover almost immediately. ^

You may be wondering how this could happen — how could crimi-
nals be infiltrating our excise tax systems? In the 1980's, the major
oil companies sold many of their brand name service stations and
fuel terminals in the New York metropolitan area. Many were sub-
sequently acquired by members of various immigrant groups,
among them immigrants from the former Soviet Union. When the
potential of motor fuel excise tax schemes was recognized by orga-
nized crime, the Russians were in an ideal position to sell bootleg
gasoline at the stations they controlled.

During 1984 through 1988, gasoline schemes abounded. They
were large schemes taking years to investigate using traditional
methods. In 1988, legislative reforms moved the point of taxation —
this is a very important point to us, sir — on gasoline from the
wholesale distributor level to the terminal rack, substantially mak-
ing it possible for us to improve compliance.

Den3ring the ability to steal gasoline excise tax revenue, the Rus-
sians quickly began to organize instead diesel fuel evasion
schemes. Because the demand for diesel fuel is much less than gas-
oline, the Russians were forced to expand their organizations from
New York into New Jersey, Pennsylvania, Georgia and Ohio, as
well as other previously unaffected areas.

The diesel fuel evasion problem worsened from 1988 to 1991. In
1993, Congress passed the Omnibus Budget Reconciliation Act of
1993. The Act moved the point of taxation for diesel fuel from the
wholesale distributor level to the terminal rack. Further, this legis-
lation provided that only dyed fuel is exempt from tax after Janu-
ary 1, 1994 and that dyed fuel cannot be used on the highway.

Formerly, fuel used for tax-exempt purposes was not distinguish-
able from the taxed product itself. This made diversion of the prod-
uct for illegal purposes a simple matter. Dyed fuel, by contrast, is

'The document referred to was marked Exhibit No. 11 and can be found on page 90.
2 The document referred to was marked Exhibit No. 12 and can be found on page 91.

exempt from the tax, and because of its vivid red coloring, any at-
tempted use of it on our highways can readily be discoverable by
IRS Examination Division personnel through spot checks at the
terminals and on the trucks.

This legislative remedy, however simple as it may seem, has pro-
duced significant increases in compliance.

Has the legislation been effective? My answer is yes. As a result
of these important legislative changes and our investigative suc-
cesses. Federal diesel fuel receipts increased during calendar year
1994 by $1.7 billion. This gave us a net revenue increase into the
Treasury of $681 million. State revenues across the Nation have
also risen.

Is the problem fixed? Not yet. I think that sometimes, a picture
is worth a thousand words, as the saying goes. This is gasoline.
This is what they started trying to bootleg and sell tax-free. When
that failed, and we corrected the problem, they moved to diesel
fuel.

I mentioned the djdng. This is what happens when they dye the
fuel, and the inspectors are looking for this in the trucks. But now
what are they doing? They are moving to this. This is what is
called on the street or in the vernacular "junk." This "junk" is
cocktailed fuel. It is taking the good diesel fuel being run in our
trucks and gasoline that is being run in our motor vehicles, and it
is being combined with such things as waste oil, transmix, toxic
waste, and other products. By doing this mixing, they are extend-
ing the volume of the taxable fuel.

Excise taxes are not paid on this extended volume. Criminals are
selling these substandard and dangerous products to unsuspecting
retail dealers and to motorists in many parts of the country. They
are clogging up the engines, and worse yet, they may be polluting
the air.

But the reason I am here is not to talk about environmental pro-
tection; it is to talk about crime. This last chart summarize some
of the most important and significant indictments that we have
been able to hand down for the period 1993 through August 1995.

Senator Roth. Could you summarize, because our time is lim-
ited?

Mr. Federico. Certainly. Quickly, what this shows is that we
have been able in these specific cases to indict 136 individuals who
were involved in tax loss investigations that totalled over $363 mil-
lion.

I do not want to leave you with the impression that the IRS is
only concerned with the effect of the fuel business. We now have
special agents actively involved in joint investigations with the
Customs Service and with the FBI regarding narcotics, health care
fraud, insurance fraud, prostitution, diversion of assets acquired
from Russia, and so on. We are also working with greater coopera-
tion internationally. We have IRS teaching financial investigation
techniques courses to Russian personnel from the various regions
of the former Soviet Union.

We are also instructing at the International Law Enforcement
Academy in Budapest, and in fact, our Commissioner just recently
participated in the dedication ceremonies for this academy in April.

We are also working on the assessment teams for the Russian
banking system and helping to make recommendations to improve
that system, including new money laundering legislation.

Finally, we are working with the MVD as partners, and they
have invited us to send and place an agent in Moscow, which we
are currently considering.

Thanks for your attention.

Senator ROTH. Thank you, Mr. Federico.

It is now my pleasure to call on Deputy Minister Kozhevnikov.
I want to say again, Mr. Minister, how much we appreciate your
being here, and we are looking forward, all of us, to your testi-
mony. Please proceed.

TESTIMONY OF IGOR NIKOLAYEVICH KOZHEVNIKOV,i DEPUTY
MINISTER OF INTERIOR, RUSSIAN MINISTRY OF INTERIOR
AFFAIRS

Mr. Kozhevnikov [Interpreted from Russian]. Allow me to ex-
press my gratitude for this opportunity to share with you my vision
of the aforementioned issue.

An analysis of the situation shows that the process of criminal-
ization has now attacked some of the more critical areas. This is
an ongoing situation, and this represents a threat to our mutual
security.

We can see a growth of regional separatism, and we can see that
this monstrous process has shown results in Chechnya and is a
tragedy not only for Chechnya but for other countries.

We have seen a reform of the economy which is perhaps not all
that comprehensible for much of society, according to experts, in
view of the high concentration of capital in the hands of private
citizens. This has not only deepened social inequality within soci-
ety, but has made for a more desperate struggle within the econ-
omy with the organized crime sector.

So that of 2.5 million persons who are working on officially reg-
istered crimes, 59 percent are qualified by the criminal law. We
have a number of criminal structures in participation. This is al-
lowed under Russian law. We see "pyramids" which involve mil-
lions of our people. Many of these people are not greedy, but people
are simply participating in these p3rramids hoping to protect their
savings.

Now we have a new flow of immigrants. We have refugees com-
ing into Russia, and this allows these newcomers to increase the
number of criminals in our country.

We can see all the dangers of the legal system, and we realize
that we have to work on our legal system. At the current time, our
Parliament is working on a project dealing with organized crime,
and we want to come up with new drafts which would allow us to
improve our legal system. We are introducing a number of very
crucial changes into our law, and we hope that by the beginning
of 1997, we will be able to apply in practice the new legal system
which we are currently introducing.

I would like to give you some figures on crime in Russia. Last
year, if we look at the number of crimes, we see a 4.7 percent in-

*The prepared statement of Mr Kozhevnikov appears on page 156.

crease over 1994, 59 percent of which are quahfied as grave of-
fenses.

Two-thirds of the officially registered crimes are of mercenary
nature, the number of thefts, armed robberies of citizens' homes,
vehicle drivers, collectives, currency exchanges significantly in-
creased.

During the past year, main efforts of the Russian law enforce-
ment agencies were focused on accomplishing tasks held by the
Federal program on enhancing crime fighting.

The number of solved crimes has increased. Persons responsible
for 837,000 grave offenses have been identified. In order to reim-
burse damage from illegal activity, forfeitures of illegal acquired
property and valuables totalled 1.5 trillion rubles. At the same
time, every fourth crime, two-thirds of armed robberies, and most
of the contract murders remain unsolved.

During the last year, a set of measures on suppressing activity
of criminal groups engaged in drug trafficking has been imple-
mented. The growth of drug-related crimes has been noted in al-
most all regions of Russia. Compared to 1985, they have increased
by 4.8 times.

Illegal production of controlled substances continues to develop.
The manufacture of drugs in underground laboratories has become
a significant factor of their illegal production and growth. However,
a more dangerous tendency is currently a rapid enhancement of
drug smuggling to Russian territory.

More than half of all confiscated controlled substances are of for-
eign origin. Almost all of such dangerous and expensive drugs as
cocaine, opium, heroin, synthetic drugs quickly filling the Russian
market are shipped from abroad by smuggling channels. Only the
customs agencies of the Russian Federation have made 764 appre-
hensions of drug traffickers, almost twice more than in 1994, which
led to forfeiture of 6.5 tons of narcotics.

The analysis of crimes relating to large shipments of drugs dem-
onstrates that about 25 percent of persons responsible for them are
citizens of the former republics of the USSR. They bring into Rus-
sia up to 30 percent of illegally circulating narcotics. Most of the
drug traffickers are citizens of Ukraine, Kazakhstan, Azerbaijan,
Lithuania and the Central Asian States.

There has been an increase in illegal shipments of drugs from
the countries of the so-called "far abroad." These are primarily
opium from Afghanistan, shipped through Tadjikistan, Kyrgyzstan,
Turkmenistan, Uzbekistan, and also cocaine from Colombia, Peru
and the United States, heroin from the Golden Triangle States, and
controlled medical substances from India. Transit of drugs through
Russia to Western Europe has become increasingly active.

Aggregate estimation of development of the above tendencies al-
lows us to make a conclusion that Russian has become a target of
international drug trafficking expansion of Russian criminal drug
trafficking groups.

Let me say a few words now on the situation with regard to ille-
gal attempts to seize or get control of radioactive materials. Theft
is one of the most dangerous types of crimes connected with illegal
trafficking of radioactive materials. Twenty-seven of such crimes
were committed in 1993, 16 in 1994, and 5 in 1995. As a rule, they

were committed by the employees of the faciUties where theft of ra-
dioactive materials took place. In 90 percent of these cases, com-
mon workers were responsible for such thefts.

Circles of persons involved in further resale have been forming
spontaneously during the search for buyers. That accounts for the
fact that there are no grounds for insisting on the existence of
mafia-type organized criminals groups specializing in theft of radio-
active materials.

Analysis of the investigation documents demonstrates that the
primary objective of such criminal attempts are the sources of ion-
izing radiation used in small quantities in various industrial de-
vices. Some cases involved theft of technological materials with iso-
tope composition based on metal uranium-238 enriched to a dif-
ferent extent by uranium-235 or its derivatives.

The above radioactive materials cannot be used in production of
nuclear weapons due to their physical characteristics.

It is essential to note that during 1994-95, we held several meet-
ings with the representatives of the United States and German law
enforcement agencies where we agreed on the mechanism of joint
activities aimed at prevention of such crimes.

I would now like to take a closer look at the issues of fighting
organized crime in Russia. Contemporary organized crime is a new
qualitative level of professional group crime. This is reflected not
only in a high level of professionalism and a developed network of
corruption links, but also by a broad scale of its activities and influ-
ence exerted on a considerable number of branches in the national
economy and power structure.

During the last 3 years, units of the Russian Ministry of Internal
Affairs elicited about 22,000 organized crime groups with different
extents of cohesion, with more than 94,000 members. Almost every
sixth group was involved in interregional and international activi-
ties, and every tenth group had corruptive links with federal insti-
tutions.

A violent struggle for the division of spheres and territories of in-
fluence was unleashed among criminal clans. Just in 1995 alone,
this led to 183 armed clashes leaving 156 persons murdered and
104 wounded.

Despite the difficulty of the criminal situation, law enforcement
agencies did not lose control over the ongoing processes, but more-
over increased their capabilities of restraining them. As a result of
the undertaken measures, criminal activities of 14,000 organized
groups were stopped during the last 3 years. Charges were brought
against 41,500 leaders and participants.

An analysis of the available information disclosed a stable tend-
ency of the increase in the number of Russian organized criminal
groups engaged in illegal activities abroad. According to the pre-
liminary estimates of the Russian Ministry of Internal Affairs, ap-
proximately 2,000 members of 110 Russian criminal groups commit
crimes in 44 countries of the world. Out of this number, approxi-
mately every fifth criminal group has established links in Germany
and every seventh in the United States.

According to our data, about 20 organized criminal groups of
Russian origin are involved in illicit activities on the territory of
the United States. Here, our data probably coincide with what we

heard here earher. Their main interests are concentrated in New
York City, Los Angeles, and Miami and include primarily money
laundering, finance fraud, racketeering, drug trafficking, and so on.
U.S. citizens are already becoming their victims. A number of
fraudulent operations committed in Russia were planned by immi-
grants from the former Soviet Union on U.S. soil.

Today, jointly with the FBI, we investigate 56 cases which in-
volve over 400 persons suspected of links with organized criminal
groups, and nearly 140 companies and organizations engaged in
money laundering and other illegal financial operations.

Investigation of the Ivankov criminal group case, the penetration
into the computer network of Citibank, the group of international
swindlers who claimed to represent a U.S. -based company,
"NEWTEL" company, are the most vivid and well-known illustra-
tions of our interaction. And we would continue this list if we want-
ed to.

I would like in conclusion to state the following. The criminals
are uniting, and they pose a real threat to the entire world commu-
nity. Meanwhile, international legal measures of extradition of
criminals and restitution of property or reimbursed money acquired
by means of illegal activities are currently insufficient.

Nowadays, the Russian Federation is making considerable efforts
to establish an appropriate international legal basis for cooperation
with our foreign partners. As you know, we intend to sign a broad-
scale U.S. -Russian treaty on mutual legal assistance as soon as
possible, and that is stated in the joint statement by President
Clinton and President Yeltsin on September 28, 1994 on coopera-
tion in the field of law enforcement and crime fighting and in the
intergovernmental agreement of 1995 between Gore and
Chernomyrdin.

We would like to ensure that these intentions be rapidly imple-
mented. I thank you for your attention.

Senator ROTH. We thank you, sir, for your very helpful testi-
mony. We will have some questions for you in just a few minutes.

First, Commissioner Weise, in your testimony, you mentioned
that the Department of Defense was defrauded by material that
was built on stolen intellectual property and was inadequate.

Could you tell me how wide or how broad are these kinds of inci-
dents? Do you have a sense of how widespread a practice this is?

Mr. Weise. It is difficult to quantify at this point. I think this
was the most significant case of its type that we had where it actu-
ally was not stolen materials, and perhaps I did not explain it well
enough. The company, Electrodyne, entered into a Government con-
tract with the United States Government, and they were properly
authorized to produce these products. But as in effect a cost-saving
move, what they did was subcontract — they sent the blueprints and
plans abroad to some of these states which were not supposed to
have these kinds of materials, significantly reduced the cost of pro-
duction, so to speak, but also created great risks in terms of our
national security. It is the first of its kind, of that type of investiga-
tion, that we have had. We have done a number of other specific
investigations relating to national security, attempting to export
products that are not supposed to go out of this country that are
highly sensitive, but this was the first of that kind of case where

they actually sent out the blueprints to be manufactured by in ef-
fect a subcontractor to a company that entered into an actual con-
tract with the Government.

We cannot really quantify the number of cases. For the record,
we will try to give you the number of cases like this in which we
have been involved, but it is hard to say how broad a problem this
is at this point. ^

Senator RoTH. You also mentioned in your written statement
that Russian organized crime is investing its assets in real estate.
Again, how widespread is that practice? What kind of real estate
are they buying? And are they also investing in businesses, like
more traditional organized crime has?

Mr. Weise. Yes, and I believe one of the other witnesses alluded
to some of the investments that are taking place in Hawaii. Like
any other organized crime group or any large crime group, they
need to launder the proceeds, the money, and they are doing it for
that reason as well as to create some semblance of legitimacy to
be able to prosper, not only continuing money laundering, but con-
tinuing a foundation for their criminal enterprise.

Again, we do not have specific numbers on the total number of
investments by Russian organized crime, but it is a growing trend,
and one that I think we are seeing in all of the law enforcement
organizations represented here, a new problem that is developing
and growing.

Senator ROTH. You also mentioned in your testimony that Rus-
sian organized crime groups in the United States are laundering
money for the Colombian drug cartels. Can you explain how these
two organizations are collaborating?

Mr. Weise. Well, I do not want to go into the specifics; we can
perhaps provide some of that outside of the public arena. But one
of the things that has really struck us about the flexibility of the
Russian organized crime is that they are very adept at dealing with
the other existing organizations, such as the Cali cartel, the people
in Colombia, the Italian mafia and others. They are very flexible
and fluid, and there seems to be some acceptance on the part of
some of these other organizations of Russian criminals as not nec-
essarily a threat, but as persons whom they can work with. And
we can talk to you about some of the specifics that we found in
some of our investigations off the record.

Senator RoTH. Mr. Moody, as I understand it, Russian organized
crime presents some unique language and cultural challenges to
law enforcement. How well-equipped is the FBI in these areas to
adequately investigate organized crime? For example, are you able
to effectively translate wiretaps, run undercover operations, and as-
sist local police in these matters?

Mr. Moody. We have a very difficult time keeping up with that.
We address it through FBI agents who do speak the language — and
we have an insufficient number of them. We also contract linguists
on a case-by-case basis, and we quite often have a difficult time
doing that, identifying those who want to work for us and identify-
ing those who will travel to where we have the need. This is a con-
tinuing problem that we have all the way across all organized

'The document referred to was marked as Exhibit No. 14 and can be found on page 97.

crime lines right now, especially in the Spanish language, the dif-
ferent Chinese languages, dialects, Japanese, and all those coming
out of Eastern Europe. This is a continuing problem throughout
law enforcement right now.

Senator Roth. Has any effort been made to use law enforcement
officials from other countries who have needed language abilities?

Mr. Moody. Yes, sir, in fact, we have. Various countries have as-
sisted us quite often in doing that. Due to some of the rules that
you work under whenever you are doing electronic surveillance, it
is quite often difficult, but there are procedures that you can set
up to allow them to assist you on a wiretap or a microphone. Gen-
erally, they help us post-recording and go through the recordings
to assist us. In fact, we have had quite a bit of assistance from the
Russian MVD; in fact, some of their officers have actually been
here in the United States and testified before grand juries, and we
are anticipating they are going to be testifying at some trials soon.

Senator RoTH. Mr. Moody, I understand that the criminal groups
in the former Soviet Union are said to be much more structured
than the Russian groups here in the United States. How do you ex-
pect the Russian criminal groups to evolve over time?

Mr. Moody. We see the Russian groups, the Eastern European
groups, establishing themselves not only in Russia but throughout
Eastern Europe and the United States, and it depends quite often
on each individual organization. For instance, we see them estab-
lishing themselves in Austria and in some of the Western Euro-
pean countries and here in the United States, based upon an indi-
vidual leader.

I anticipate, based on 25 years in organized crime, that we are
going to continue to see them evolve and build more structured or-
ganizations, and that a lot of the organizations that we see today
will fall by the wayside; they will either be destroyed in fights for
territory, or they will be absorbed by some of the stronger groups.
And as they become more structured, they will set up various co-
ordinating mechanisms, like the Cosa Nostra here in the United
States.

In fact, we are beginning to pick up some intelligence at this
time that they are beginning to coordinate their activities inter-
group, internationally, at this time.

Senator ROTH. Thank you.

Mr. Federico, as you pointed out, we have passed some legisla-
tion that has significantly helped the situation but has not entirely
eliminated it. What more do you think we can do here, particularly
in the Congress, to help address the problem of fuel tax fraud?

Mr. Federico. One of the issues currently before you involves
kerosene. Kerosene currently is not a taxed fuel. Kerosene at times,
though, is being utilized to what we call "blend." Like I pointed out
with the cocktailing, blending increases the volume.

What is before you right now for your consideration is to impose
a tax similar in amount to the diesel fuel tax for kerosene; this
likewise would be taxed at the terminal rack, and that could great-
ly assist.

Also, as far as a direct law enforcement need for the IRS is a bill
that is currently pending as part of the tax reform bill that Senator
Pryor has introduced that involves "churning." This gives the IRS

authority to use any quote-unquote "profit" that it earns during an
undercover operation to be used back in that operation to help with
the budget of that particular operation. That is under consideration
right now by the Senate.

Senator ROTH. Your testimony mentioned that bootlegging of
motor fuel over State lines continues to be a major problem.

Mr. Federico. Yes, Senator. As we started to correct the issue
of a Federal tax, moving it back from the wholesaler or the retailer
to the terminal rack, that really took the wind out of their sails,
if you will. What we are finding going on now is that they are buy-
ing gas or diesel fuel in low-tax States, moving that, bootlegging it,
trucking it, to high-tax States, and then selling it there; and there-
fore the profit margin would be the difference between the two
taxes. That is one of the issues that is going on.

The other way of bootlegging we have found is to move the gaso-
line or diesel fuel from foreign countries such as Canada and bring-
ing it into the United States and applying for a rebate of the tax
in Canada, then selling it at the higher price here in the United
States, saving the tax, naturally.

Senator ROTH. Deputy Minister Kozhevnikov, you mentioned
that criminal groups in Russia have sent their associates to the
United States to establish companies that ship illegal drugs and
weapons to the former Soviet Union. Do you have any specific evi-
dence of that?

Mr. Kozhevnikov [Interpreted from Russian]. Yes, I do have
some specific instances where we have managed to discover such
instances; I do have specific data on that.

Senator ROTH. And is that true of weapons as well as drugs?

Mr. Kozhevnikov [Interpreted from Russian]. No. This would be
drugs.

Senator RoTH. Mr. Minister, you are no doubt familiar with the
trial in this country of the Russian criminal leader, Ivankov. How
powerful was this man in Russia, and why did he leave your coun-
try to come to the United States?

Mr. Kozhevnikov [Interpreted from Russian]. We think Mr.
Ivankov was basically trying to escape arrest in our country, and
he felt the United States would provide a safe haven.

As far as Ivankov is concerned, he was a prominent leader of or-
ganized crime in Russia; he was a hardened professional thief who
was very respected by his colleagues. They have a special title for
people like that; he has the special distinction of being what is
called a "legal thief." It is a special title, meaning a hardened, high-
level criminal. And Ivankov evidently realized that his arrest was
imminent, and that is why he chose to attempt to leave Russia.

We worked on this particular case together with the FBI. We
sent 200 persons here to work on the operation. I hope that the
trial in court will be successful in its conclusion.

Senator RoTH. Mr. Minister, some hockey players from the
former Soviet Union who play professionally in the United States
have become victims of extortion. Is this also a problem in the
former Soviet Union, where these players often visit and still have
families?

Mr. Kozhevnikov [Interpreted from Russian]. I would not say
that our professional athletes are a particular problem inasmuch as

on Russian territory, for example. We do have individual incidents,
but we do have incidents of extortion not only of athletes, but of
a number of persons who have considerable financial wherewithal.
But I would not say that this is a particular problem with regard
to athletes specifically. That is my opinion, an3^way.

Senator Roth. I will ask you one further question, Mr. Minister.
You testified about the theft of radioactive material from facilities
in the former Soviet Union. You also testified that this was not ma-
terial that could be used for manufacturing nuclear weapons. Are
there any cases where material or intellectual property, has been
stolen or sold, to your knowledge?

Mr. KOZHEVNIKOV [Interpreted from Russian]. Well, we have the
federal security system. That is their purview, actually; that is
their bailiwick. I am unable to provide you with the appropriate in-
formation in that regard because I do not have the facts at hand.

Senator Roth. Thank you.

Senator Lieberman?

Senator LlEBERMAN. Thank you, Mr. Chairman, and thank you,
gentlemen from the U.S., and thank you, Minister Kozhevnikov, for
the cooperation of the MVD with Arnerican law enforcement and
for taking the time to be with us this morning.

Let me begin with a general question. In the private sector, when
a new business comes in to compete with an existing business, ei-
ther the market expands, or the existing business goes out of busi-
ness or diversifies and goes into something else.

So here, with a whole new generation of organized criminals and
so-called Russian organized crime families or groups coming in, I
am wondering what you would say has been the reaction of the ex-
isting illegal business groups, the existing organized crime families.
Are some of them going into other areas, or do we have a
generational change happening where, in a sense, the children now
go into legitimate businesses, and that is the end of that operation,
or is just the market expanding?

Mr. Moody, do you want to start?

Mr. Moody. What we see is that, for instance, the gas tax fraud
really started with the American La Cosa Nostra. What we see
happening today is that the La Cosa Nostra will basically franchise
the operation to the Russian groups and get a kickback in all this,
so that everybody makes money.

We do not see Russian groups coming in and trying to vie and
fight for territory with other organized crime groups. They enter
into cooperative agreements. There is enough money out there to
be stolen by everybody, and they share the profits.

Senator LlEBERMAN. Mr. Federico or Mr. Weise, does that con-
form to your perception of what is happening?

Mr. Federico. That conforms exactly to what we have seen. As
Mr. Moody said, the Italian mafia, if you will, in New York started
the idea of the daisy chain that we described. They then used the
abilities of the Russians who had purchased the retail service out-
lets, and that was a perfect forum for the Russians to get into that.
They pay tribute to each other and in fact share the illegal profits.

Mr. Weise. I do not have anything to add to that, Senator.

Senator LlEBERMAN. So the age of mergers has reached illegal ac-
tivities as well as legal activities in this country, but apparently

25-049 0-96-2

without the same effects of downsizing that occur in the private
sector.

Mr. Federico. It is much more efficient.

Senator LiEBERMAN. It is much more efficient, and the employ-
ment opportunities continue to be vigorous.

Mr. Moody. Very much so; they are expanding, not downsizing.

Senator LiEBERMAN. In that regard, I was interested in your tes-
timony, Mr. Weise, about the interception that Customs has done
of heroin and other illegal drugs which have been transshipped
through the former Soviet Union and the former Warsaw Bloc.

First, do you have a sense of how significant a proportion of the
drugs coming into the United States are coming through this so-
called Russian organized crime network? We tend to think of the
drugs coming in most significantly from Latin America, although I
know it is more complicated than that.

Mr. Weise. It is difficult to quantify at this point, Senator, but
I would say at this point it is very small in terms of total percent-
age, but it is growing and growing at a fairly fast pace.

Senator LiEBERMAN. Were you tipped off in the case that you de-
scribed by law enforcement authorities from the former Soviet
Union or Warsaw Bloc countries as to the transshipment of illegal
drugs, or was that discovered here at point of entry?

Mr. Weise. We have various cases that are working, but that one
particular case, we did have some undercover information, and we
have had cooperation with other law enforcement organizations in
the former Soviet Union.

Senator LiEBERMAN. And am I correct, hearing your testimony,
in saying that the level of that cooperation with law enforcement
in the former Soviet Union is going up and is becoming more exten-
sive?

Mr. Weise. Yes.

Senator LiEBERMAN. I wanted to get to a point related to that.
Senator Roth mentioned in his opening comments that there is not
an extradition treaty that now exists between the United States
and Russia. I assume that it would be helpful to your efforts, gen-
tlemen, if such a treaty existed. Am I correct in that?

Mr. Moody. Senator, when we first started out, there were no
treaties at all. The example Mr. Federico used of the gas tax fraud
in Philadelphia, when that case was indicted, there were five indi-
viduals who fled back to Eastern Europe. Two of them fled to Rus-
sia, two fled to the Ukraine, and I do not know where the fifth one
went. At that point, I contacted my counterpart in the MVD and
asked him for assistance in Russia to arrest David Shuster and
Dmitry Belokopytov, and they did. They arrested for us those two
individuals and put them on an airplane flying directly back into
the United States, with FBI agents abroad, so that we could then
arrest them here in the United States.

At the same time, the two individuals who fled to the Ukraine
heard about it, and since the Russian authorities were shot at
when they went out to arrest Shuster and Belakopytov, and there
was a little physical restraint of these two individuals, well, the
two individuals in the Ukraine voluntarily came back.

Senator LiEBERMAN. They were made an offer they could not
refuse.

Mr. Moody. Yes, sir. The Russian authorities did a very good job.
When my FBI agent showed up and talked to Mr. Shuster, he said
that he was bringing him back to the United States for arrest, and
if he gave him any problem, he was going to leave him in Russia;
and Shuster's response was, "There will be no problem."

From that position, we have gone on, and today, we have a legal
agreement that has been signed by Vice President Gore and Vice
Premier Chernomyrdin, and we are working toward a mutual legal
assistance treaty. I believe that we really need to have that mutual
legal assistance treaty which would cover all of this.

Senator Lieberman. So it is not a formal extradition treaty, but
there now is a legal agreement that has been achieved at the Gore-
Chernomyrden level, and we are moving toward that.

Mr. Moody. Yes, sir.

Senator LlEBERMAN. It is very interesting that the movement of
the criminals once identified is not only as it was in the case of Mr.
Ivankov that you described from the former Soviet Union here, but
also that when indicted here, some of the Russian crime figures
have gone back there. So it is obviously important that we have
mutual extradition.

I did want to ask both Mr. Kozhevnikov and the others, in the
case of Mr. Ivankov, did you know when he was heading to the
United States? Were you able to track him at that time? And then
I want to ask the Americans here how did he gain entry into the
United States?

Mr. Moody. If I may add. Senator, we are not exactly sure how
he gained entry into the United States. The Russian authorities
told us he was coming and that he came into the United States.
We are not exactly sure. We know he went in and out of the United
States a number of times. The Russian authorities told us about
him and basically where he was located and enabled us to start
targeting him for investigation, which ultimately led, with their co-
operation, to his indictment. I believe he goes on trial this month.

When we arrested him, I believe we found him with seven dif-
ferent passports in seven different names. That gives you some
idea of what we are facing internationally today with the rapid
communication systems, with the rapid ability to travel inter-
nationally, and with the counterfeiting — or a lot of these passports
are legitimate passports in a number of different names — it is very
difficult to keep up with these individuals.

Senator RoTH. Were they all phony passports, or were they bona
fide?

Mr. Moody. Some of them were legitimate with different names.

Senator Lieberman. So that in other words, they are unlikely to
be coming in under their real names. I am wondering to what ex-
tent it would help if in this cooperative relationship you have with
the Russian authorities — well, the immigration officials, for in-
stance, had a list of the names of organized Russian crime fami-
lies

Mr. Moody. We have received lists of names from the Russian
authorities and have provided them to Immigration to help keep
these individuals out. We have also provided them to the State De-
partment as a screening mechanism.

Senator LlEBERMAN. Has that had any effect in the sense of ap-
prehending any of them, or are they coming in mostly under as-
sumed names?

Mr. Moody. If I may, it has had more of a deterrent effect; it
makes it a httle more difficult for them to come in. And there are
certain very well-known individuals who are trying to come into
the United States who have been barred from coming into the
United States.

Senator Lieberman. Very well-known as organized crime figures
in Russia?

Mr. Moody. Yes, sir.

Senator LlEBERMAN. And again, are they attempting to come in
to escape prosecution in Russia, or are they just coming in because
it is better business? Mr. Kozhevnikov?

Mr. Kozhevnikov [Interpreted from Russian] . I can say that you
are correct when you speak about the need to exchange more infor-
mation. I have in mind information which each side has at its dis-
posal. We are working with the FBI just now to prepare a list of
persons who, in our view, are planning to move to the United
States to engage in criminal activity, and we intend to hand it over
in the near future. But we would like also to get similar informa-
tion on former citizens who are already here now and have been
convicted so that we might be able to use this information for our
own purposes.

On the whole, I would say we are moving in the direction of clos-
er cooperation.

Senator LlEBERMAN. That is good news for both sides, and I hope
it will continue. May I ask you this question, and you alluded to
it in your testimony. There has been a general impression given
that Russian organized crime figures here in this country are not
operating, at least at this point, in a tightly-structured organiza-
tion, that there are more individual illegal entrepreneurs! Do you
have any evidence that the Russian criminal figures are sending
members of their groups over here to go into this, and are there
continuing relations, economic or otherwise, between the crime
families in Russia and those Russian organized crime figures here,
or is it totally a separate, independent operation in the United
States?

Mr. Kozhevnikov [Interpreted from Russian]. We were speaking
of well-known criminal families — I missed the beginning of that; I
did not hear the soundtrack.

Senator LlEBERMAN. Unfortunately, the translation was not
working earlier. Let me just ask the basic question again very
briefly. Is there a connection between organized crime families in
Russia and those that operate here in the United States?

Mr. Kozhevnikov [Interpreted from Russian]. We have at our
disposal preliminary intelligence to the effect that such contacts
are taking place.

Senator LlEBERMAN. Thank you.

I have a final question for the gentlemen from U.S. law enforce-
ment. As to the violence that is being committed by members of
Russian organized crime, is it as we have become accustomed to ex-
periencing with earlier groups, primarily within the groups them-
selves fighting for turf, or is violence used against nonmembers.

against the targets of extortion or other criminal activities by Rus-
sian organized crime in the United States?

Mr. Moody. We see the use of both. In a case out of Philadel-
phia, I believe, 10 Russians were killed. They were killing each
other during that investigation. But we also see in the Ivankov in-
vestigation that the father of one of the victims was beaten to
death on a subway platform in Moscow. We see both the use of vio-
lence — they very readily use violence, and they very readily use vi-
olence against law enforcement.

Mr. Federico. That is a trait that I think we have to respect and
guard against, their willingness to use violence against law enforce-
ment.

Senator LlEBERMAN. Including in the United States?

Mr. Moody. I do not know of any specific example in the United
States yet. We have picked up intelligence information that it is
being considered.

Senator LlEBERMAN. But they have employed violence against
law enforcement within Russia.

Mr. Moody. Within Russia, it is a very significant problem, and
maybe he will tell you about it — the number of law enforcement of-
ficials who have been killed in the last few years.

Senator LlEBERMAN. Am I correct that that traditionally has not
been a pattern of organized crime?

Mr. Moody. In the United States.

Senator LlEBERMAN. Yes, in the United States, that they have
not used violence against law enforcement for fear of reprisals, I
presume.

Mr. Moody. That is correct; in the United States, they have not.

Senator LlEBERMAN. So that if these intelligence reports are cor-
rect, it would be a new and, to put it mildly, unsettling, outrageous
development here.

Mr. Moody. Yes, sir. We have had discussions with certain of
these individuals about the down sides of doing something like
that.

Senator LlEBERMAN. So you have actually had informal but direct
warnings?

Mr. Moody. Yes, sir. We have had the same thing over the years
with the La Cosa Nostra.

Senator LlEBERMAN. Thank you for what you are doing. I wish
you well.

Thank you, Mr. Chairman.

Senator Roth. Thank you.

Senator Cohen?

Senator Cohen. Thank you, Mr. Chairman.

I know this panel has been going on for some time, and we want
to release them so we can get to the other panels, but I would just
like to pose a couple of thoughts.

Since I have served on this Subcommittee, we have investigated
a variety of issues involving organized crime. We have investigated,
for example, the organization of "chop shops" in the United States,
money laundering operations, currency exchange operators along
our borders, professional boxing, a whole variety of areas. We have
found a commonality of issues involved in each of these cases.

Number one, there are big profits involved. Whenever there are
big profits, and on the other side of the equation, you have low
risk — low risk of detection, low risk of prosecution, low risk of con-
viction and low risk of sentencing — you are going to have a pro-
liferation of activity in this particular field. We have found it in vir-
tually every area we have ever investigated.

What comes to mind as I listened to the testimony this morning
is that we have precisely the same situation here. There is a very
low rate of detection — I think you indicated, Mr. Weise, that but
for the agent sitting behind you and his picking up one small piece
of information, that business of Electrodyne exporting the blue-
prints never would have been detected.

That raises several issues in my mind. First of all, on the first
chart you showed, you indicated that there were 6,000 grams of
heroin being smuggled in, and you said that 14 people have been
convicted. My question is what were the sentences given out to
those 14 individuals who were convicted?

Mr. Weise. We will get you that specifically for the record, ^ Sen-
ator, but I am being informed that it was consistent with the Fed-
eral guidelines on each of those kinds of cases; but we will get you
that specifically. But your point is well-taken, that probably one
might say it was not severe enough.

Senator COHEN. Well, whether we are talking about heroin
smuggling, auto theft, military equipment coming back into the
United States, the question is what are the chances of it being de-
tected, successfully prosecuted, and if prosecuted successfully, what
is the sentence going to be? I raise this in connection with Mr.
Kozhevnikov, and I will turn to him in a moment, but I read the
memoirs of Natan Sharansky. I assume that the prison conditions
and sentences in Mother Russia are not exactly "Club Fed," or
maybe in this case. Club Med, but in any event, I assume that the
authorities in Russia do not have Federal courts which oversee the
living conditions, the number of people who serve in their particu-
lar prisons, whether or not their living conditions are up to stand-
ards as far as Federal standards are concerned.

In other words, we have a situation where you have people who
are leaving, organized crime figures who leave Russia to come here,
with little prospect of being caught, detected, convicted, and then
sentenced to what — something that is quite easy, I would assume,
by Russian standards. As I go back and read Sharansky's memoirs
being put away, is not exactly a holiday.

So I raise this as an issue because it seems to me — and you have
indicated, Mr. Moody, that this is in the initial stages. What is
going to stop this tide from expanding if in fact they keep looking
at the profit side, with the low risk of detection and prosecution,
and then what is the penalty going to be?

I think it is probably not feasible, but one might propose that if
we have these international links that have been established, as
Senator Lieberman was talking about, between organized Russian
gangs here and the gangs back home, perhaps we might have a
policy of extradition, and if we in fact apprehend people who are
violating our laws, and they do have connections back to the home-

'The response to this question was marked Exhibit No. 14 and can be found on page 97.

land, that we send them there for prosecution and conviction and
sentencing. That might be a greater disincentive than we currently
have under our own rules.

Mr. Weise, you got my attention in terms of Electrodyne sending
out these blueprints basically to subcontract to manufacture cer-
tain component parts that go into our military equipment. We have
all been fixated, and justifiably so, on the recent tragedy that oc-
curred with one of our commercial airliners going down. We have
had evidence, for example, that suspected unapproved parts are
making their way back into the commercial airline industry, that
is cause for concern to all of us. But if you think about the implica-
tions of allowing parts to our military equipment being factored out
or subcontracted out, coming back in, it would seem to me to make
logical sense for a foreign military or intelligence operation to in
fact encourage organized criminal groups to be manufactured parts
to come back into the United States to go into our military equip-
ment.

It would seem to me you would have a perfect marriage between
officials of another government cooperating with organized criminal
elements to achieve precisely the placing of defective or inferior
parts in your potential adversaries' military equipment.

Mr. Weise. Senator, that is precisely the reason why we included
that example in our testimony notwithstanding the fact that we do
not have direct evidence of whether or not it is

Senator COHEN. But it raises another issue as to what we can
do about it. For example, is there any law that would prohibit a
major military contractor in the United States from contracting out
the manufacture of certain component parts to established allies?
We know, for example, that when we talk about an American-made
car, the engine might come from Canada, the body might come
from Mexico, the electronics might come from Japan.

Now, we are talking about a multinational defense contractor. Is
there any prohibition — you are going to be advised there in a mo-
ment — is there any prohibition on these multinational contractors
from having any of the parts made in other countries that are al-
lies of ours?

Mr. Weise. Well, clearly. Senator, you are getting well beyond
our area of expertise, and yet what is being whispered to me is that
there are Department of Defense guidelines, which obviously the
Department of Defense would be much more appropriate to be an-
swering these questions.

Senator COHEN. Then, my follow-up question would be do you
have any kind of a liaison relationship with the Department of De-
fense to coordinate your investigations with DOD. Are you able to
determine whether or not, if it is permissible — we have what we
call "false flag" operations in the business, an ally could be manu-
facturing a component part for a piece of defense equipment which
in turn has been compromised because that particular operation is
really being run by another organization by another country.

Mr. Weise. And the answer to your question is we clearly con-
sulted very closely with the Department of Defense, both on these
matters and all of our export control responsibilities.

Senator COHEN. OK.

Mr. Kozhevnikov, how many police have been murdered in Rus-
sia in the last year or so? Is it roughly 500?

Mr. Kozhevnikov [Interpreted from Russian]. I think I can give
you the exact number; about 278 in 1995. These are persons who
were involved in performing their formal obligation.

Senator COHEN. And do you have any evidence of Russian politi-
cal figures being either extorted, intimidated or otherwise com-
promised by organized crime groups in Russia?

Mr. Kozhevnikov [Interpreted from Russian]. Well, if we want
to speak about well-known political figures, we do not have such
data or information. If we want to speak about local authorities,
yes, we can confirm that such instances do take place.

Senator COHEN. We know that organized Chechen groups that
operate in southern Russia are involved in a produce inventory op-
eration. Do you know whether any of the Chechen organized
groups operate in the United States?

Mr. Kozhevnikov [Interpreted from Russian]. I have no informa-
tion on Chechens in the United States.

Senator Cohen. Thank you.

Thank you very much, Mr. Chairman. I know you are anxious to
move on.

Mr. Moody. Senator, we have arrested Chechens in the United
States.

Senator ROTH. Thank you.

Thank you, Senator Cohen, and thank you, gentlemen, very
much. We appreciate your very helpful and informative testimony.

Mr. Minister, thank you again for being here.

At this time, I would like to call forward our next witness, Mi-
chael Franzese, a former captain in the Colombo organized crime
family.

Mr. Franzese, as you know, we swear in all witnesses who ap-
pear before this Subcommittee, so would you please rise and raise
your right hand?

Mr. Franzese. Yes.

Senator Roth. Do you swear or affirm that the testimony you
will give to this Subcommittee will be the truth, the whole truth,
and nothing but the truth, so help you, God?

Mr. Franzese. I do.

Senator ROTH. Thank you, and please proceed with your testi-
mony.

TESTIMONY OF MICHAEL FRANZESE,i FORMER CAPO,
COLOMBO ORGANIZED CRIME FAMILY

Mr. Franzese. Good morning, distinguished Members of the Sub-
committee.

My name is Michael Franzese, and I have been subpoenaed here
today to address the Subcommittee regarding my personal experi-
ences with Russian organized crime in the United States. I order
to understand the extent of that activity, the Subcommittee needs
to be aware of my own background and former involvement in or-
ganized crime.

'The prepared statement of Mr. Franzese appears on page 162.

I was born in Brooklyn, New York. My father is John "Sonny"
Franzese, former underboss of the Colombo crime family, one of
New York's five La Cosa Nostra families. In 1975, I became a
"made" member of the Colombo family, in a formal induction cere-
mony presided over by then family boss, Thomas DiBella.

I acted in the capacity of "soldier" from 1975 through 1980, when
I was appointed a "Caporegime" and given a crew of soldiers to pre-
side over.

During the years I was a member, I engaged in criminal activity
on my own behalf as well as that of the Colombo family, such
criminal activity included tax fi-aud, loan sharking, gambling, secu-
rities fi'aud, labor racketeering and extortion.

In 1985, I was indicted in the Eastern District of New York for
various racketeering charges. In 1986, as part of a plea agreement
with the Organized Crime Strike Force of the Department of Jus-
tice, I pled guilty to 2 counts of the 28-count indictment relating
to tax fraud. I accepted a 10-year prison sentence and $15 million
in fines and restitution.

In or about 1987, while in Federal prison in California, I decided
to sever my 12-year relationship with the Colombo crime family
and organized crime in general. As I address the Subcommittee
here today, I am no longer a member of organized crime.

In early 1980, while I was a Colombo family soldier, Lawrence
lorizzo, a major independent gasoline wholesaler based in Long Is-
land, New York, came to me for protection. lorizzo and Russian or-
ganized crime figures working independently of one another each
figured out how to orchestrate one of the most lucrative Govern-
ment rip-offs of all time — stealing gas tax money.

As you have been told by previous witnesses, this was a complex
scam that, over the years, has netted Italian and Russian orga-
nized crime hundreds and hundreds of millions of dollars. And the
Russians pioneered and perfected these schemes to where I under-
stand it is still going on today despite changes in the law.

I first got involved because some mob figures were trying to
shake down lorizzo. lorizzo owned or operated some 300 independ-
ent gas stations throughout Long Island at that time. It was a
cash-heavy operation. I resolved lorizzo's problem by sending some
of my men over to let these other mob figures know lorizzo was
with me. That ended lorizzo's problem. In return, I became his
partner in the wholesale gasoline business, and this business be-
came an organized crime-controlled operation.

Later in 1980, I began working with Russians in the gas tax
business. One of my soldiers, a guy named Vinnie, had been ap-
proached by the Russians to help collect a $70,000 debt. Vinnie's
job was to say, "Pay the money, or I'll break your legs," and to
sound convincing, which he was. My guy came to me with the Rus-
sian's offer to see if I was interested. I was, and so I arranged a
meeting with the leaders of this Russian organized crime group —
Michael Markowitz, David Bogatin, and Lev Persits. These men
owned and operated a wholesale gasoline company in Brookl3m,
New York.

These Russians were having trouble collecting money owned
them. They were also having problems obtaining and holding onto
the licenses they needed to keep the gas tax scam going. I could

help them on both counts. First, the Colombo family's reputation
was very effective in causing people to pay their debts. Also, our
family had a guy at the commissioner of revenue's office at the
State House in Albany who could get the necessary licenses.

The Russians were eager to align themselves with someone who
could resolve both problems. Because of my association with orga-
nized crime, they believed me to be that person. As it turned out,
I was.

We arranged a sit-down on a Saturday morning in the fall of
1980 at a Mobil station they owned in Brooklyn. The three Rus-
sians told me how they were stealing tax money due the Govern-
ment on the sale of gasoline and how they often ran into problems
collecting some of the illegal proceeds from their customers.

We cut a deal whereby they agreed to become part of my organi-
zation. I would provide them with protection from the other mob
families and the muscle to collect all the money due them. Through
the services of Lawrence lorizzo and our gasoline operation, they
would have access to the wholesale licenses they needed to defraud
the State, county, and Federal Government out of tax revenue.

We agreed to share the illegal proceeds, 75 percent my end, 25
percent their end. The deal was put on record with all five crime
families, and I took care of the Colombo family share out of the ille-
gal proceeds of my end.

Over the next 4V2 years, the combined Russian-Iorizzo organiza-
tion which I controlled defrauded the United States Government
and the States and counties of New York, Connecticut, New Jersey,
Pennsylvania and Florida out of hundreds of millions of tax dollars
due on the sale of gasoline.

To give you an idea how lucrative the gas tax business was, it
was not unusual for me to receive $9 million in cash per week in
paper bags from the Russians and lorizzo. Our profits ran any-
where from 2 to 30 cents per gallon, and at one point, we were
moving 400 to 500 million gallons per month. I will leave it to you
to do the math.

During that time, I became very closely involved with the Rus-
sian group. I found them to be intelligent, possessing remarkable
business instincts that they would not hesitate to use for illegal
gain. As a result of their experiences living in Communist Russia,
they have little respect for United States law and little fear of
American prisons.

They would fi-equently approach me with other illegal business
ventures and were eager to share in illegal deals I would propose
to them, such as loan sharking, insurance fraud and securities
fraud.

One of the business ventures we jointly entered into was bujdng
a bank in Austria. The purpose of this transaction was to be able
to use this bank to finance other organized crime ventures. I in-
vested $10 million from my end of the illegal gas tax profits in this
bank.

Including the money invested by the Russians, the bank had a
total of $80 to $100 million in assets. Bogatin later went to Austria,
where he played an active role in operating this bank. Additionally,
lorizzo created a slush fund from Federal gas tax money, which he

kept in this Austrian bank. That account accumulated $15 milhon
when the Government seized it after lorizzo's arrest.

I found the Russians to be a group that wanted to flex their mus-
cles and would not hesitate to resort to violence when they felt it
necessary to do so. They enjoyed the relationship with both myself
and the Colombo family because it gave them power and recogni-
tion as a group to be reckoned with.

I did not find the Russian criminals to be a very structured
group in comparison to the Italian La Cosa Nostra. They were very
clannish, however, and the most financially successful Russian was
looked up to by his comrades as their leader or boss. The boss was
given a lot of courtesy and respect and in return provided the mem-
bers of his group with opportunities to work for him and make
money.

Michael Markowitz, David Bogatin and Lev Persits were all in
a position of leadership and had about 200 other Russians working
under them in various capacities. They were also continuously as-
sisting other Russians in immigrating to the United States.

After I went to prison in 1985, my information was that
Markowitz, Bogatin and Persits did continue to work with the
Colombo family in the gasoline business for a short period of time.

Around 1988, Markowitz was shot and killed in fi'ont of his home
in Brooklyn. I do not know who was responsible for his death. How-
ever, I am reasonably certain that the hit was authorized by the
Colombo family and could possibly have been carried out by other
Russians.

An attempt was also made on the life of Lev Persits. Although
he survived the attempt, he is permanently disabled and confined
to a wheelchair today.

David Bogatin fled to Austria, where he had a controlling inter-
est in the bank that was funded with gasoline tax money from our
operation. He was captured in Poland, extradited to the United
States to face tax fraud charges and is currently serving a Federal
prison sentence.

I have provided the Subcommittee with a basic overview of my
personal experience with Russian immigrants engaging in criminal
activities during the 1980's. I hope this information is helpful, and
I would be happy to answer any questions the Subcommittee might
have.

Thank you.

Senator RoTH. Thank you, Mr. Franzese. You stated that in your
opinion, these fraudulent measures with the fuel tax continue.
Does it continue on as large a scale as in the past?

Mr. Franzese. I do not believe so. I believe that once the law
was changed, the volume and the methods decreased. But I am
told — I was recently released from prison in 1994, and I met sev-
eral people who had still been dealing with the Russians, and I am
told that especially in New York, the gas tax scheme was continu-
ing as late as 1994.

Senator ROTH. And on a fairly large scale?

Mr. Franzese. Yes, on a large scale, but not quite as large as
it was in the 1980's.

Senator ROTH. At the peak of your gas tax business, how many
gas stations were involved?

Mr. Franzese. I would say well over 600 stations, and it could
have been close to 1,000 gas stations that we operated or sold gas
to.

Senator Roth. And how many of those were brand name sta-
tions?

Mr. Franzese. Approximately a third.

Senator ROTH. How were you first introduced to the Russians?

Mr. Franzese. I met the Russians through a soldier in my orga-
nization. The Russians had gone to him, asking if he could help
them collect a debt. They were owed $70,000. This fellow, whose
name was Vinnie, came to me and asked my permission to assist
the Russians, and I told him he could do it. At that point, they
asked to meet me personally, and a meeting was set up.

Senator ROTH. Now, you testified that you provided the Russians
with protection from other organized crime families and muscle to
collect their debts. What exactly did you do in each of these areas?

Mr. Franzese. Well, as far as collecting the debts, I just made
sure that any gasoline stations or other wholesalers that they serv-
iced would pay the money that was due them. And as far as pro-
tecting them from other organized crime groups, I put them on
record with every other family that they were with me and part of
my operation and that no one else was to try to muscle in on them
or try to do business with them.

Senator Roth. If the Russians brought this business to you, how
did you come to the decision that there would be a 75-25 percent
split?

Mr. Franzese. I explained to them that we were taking most of
the risk, we were securing the license, and that I had to take care
of the rest of the Colombo family and, quite honestly, I knew that
to a large degree, they controlled some of the money, and there was
a lot of stealing going on amongst each other. So I just rounded it
off to 75-25 percent, and they were satisfied with that.

Senator ROTH. Out of the 75 percent you took, how much did you
keep and how much went to the Colombo family?

Mr. Franzese. About one-third went to the Colombo family. The
other two-thirds was split among myself and the various people
that I had working in the operation.

Senator Roth. Since Markowitz was such a big money-maker for
you and the Colombo family, why was he killed?

Mr. Franzese. I believe for two reasons. Number one, he was re-
luctant to work with the rest of the Colombo family once I went
to prison. And I also understand that he might have been cooperat-
ing with Federal authorities.

Senator Roth. Do you have any insights as to how Russian orga-
nized crime is developing in this country? Do you have any knowl-
edge as to how they are cooperating with more traditional, estab-
lished organized crime families?

Mr. Franzese. I could only speak of my own experience, that
they were very willing to cooperate with our group. La Cosa
Nostra. They were not interested in trying to fight with us; they
would rather share proceeds. They had no problem with working
along with us. And from my understanding, they are continuing to
operate in that way today.

Senator Roth. Senator Cohen?

Senator COHEN. Had the Colombo family not thought of the fuel
tax scam previously, before the Russians arrived?

Mr. Franzese. The Colombo family had not. I actually intro-
duced this to the Colombo family when lorizzo came to me origi-
nally, and we had developed this scheme, and to my surprise, I
found out the Russians were also doing it when I met them; they
just did not have the muscle to collect their money, and they did
not have the availability of the licenses that were needed.

Senator COHEN. I am just curious as to why you would want to
share any part of the market with anyone. In other words, you
have an established organized criminal group; why would you want
to share on a 75-25 or 50-50 or any percentage basis? If you have
an idea, and you have the organization, and you have the muscle
yourself, why would you want to let another group come in and
take a portion of it?

Mr. Franzese. Well, the way the transaction worked, the Rus-
sians had about 300 stations themselves that they were supplying.
So by allowing them to write off on our license, we obtained pro-
ceeds from those 300 stations that we would not ordinarily have
had.

Senator Cohen. In other words, they were already in the busi-
ness, and this was just a pure business decision to share the
wealth at that particular point.

Mr. Franzese. Yes.

Senator COHEN. But if I were to come up now as a result of lis-
tening to your testimony and others, and say, "Hey, I've got a great
idea of how to scam the Government," would I find resistance from
organized criminal elements to my entering the marketplace?

Mr. Franzese. I do not believe so. If you brought profit to the
table, I do not believe there would be any resistance at all.

Senator Cohen. If I have an idea, and I do not have the muscle,
they would be willing to allow me to enter the marketplace?

Mr. Franzese. I believe so, yes.

Senator COHEN. So there was no fear on the part of the existing
organized criminal groups that they would have to deal with the
violent element in the Russian gangs; was that not a factor?

Mr. Franzese. There was no fear at all from La Cosa Nostra, no.
They were not worried about that. I found the Russians to be actu-
ally kind of submissive to us. Although I found they would not
hesitate to be violent amongst each other, I thought that they were
really worried about us, and I thought they were fearful of us as
a group, and therefore they would rather align with us than fight
with us.

Senator COHEN. You also indicated that the Russians have no
fear of our laws as such; right?

Mr. Franzese. Yes. They indicated to me that Russian prisons
were hell and that the prisons here in America were like clubs, and
the laws in Russia were very strict. As a matter of fact, I know
Bogatin had done some time, and I think both Markowitz and
Persits had experienced Russian prisons. So they had no fear what-
soever of the law or the prison system here.

Senator Cohen. And that would continue to be the case today,
then?

Mr. Franzese. I believe so. I do not know why it would change
so dramatically.

Senator Cohen. What might be hard time for you might not be
hard time for someone else.

Mr. Franzese. According to them, that is correct.

Senator Cohen. Do you know whether they are tied to other or-
ganized criminal groups of the Sicilians, the Colombians? Are they
engaging in narcotics traffic in cooperation with other existing
groups?

Mr. Franzese. I do not know that from my own personal knowl-
edge, no.

Senator COHEN. Do you know whether the new Russian orga-
nized criminal elements coming into the United States are more
violent than the existing ones?

Mr. Franzese. I am hearing that they are more violent, yes.

Senator COHEN. And also more sophisticated in terms of their ca-
pabilities?

Mr. Franzese. Well, I thought the group that I was with was
very sophisticated. Markowitz had several educational degrees. He
was an engineer. He had developed a taxi meter, a computerized
meter, that I think was first introduced in New York. I found them
to be very intelligent even at that time.

Senator Cohen. I was going to bring this out in the previous
panel, but my understanding is that the FBI is looking for a few
good men and women, particularly with backgrounds in math and
computer science, in order to combat the sophistication of the crime
groups that are coming in.

Mr. Franzese. Yes.

Senator Cohen. And I guess we are going to have to do that for
the IRS and the FBI and all the other elements involved, because
as criminal groups become more sophisticated, as they move into
cyberspace, as they are able to engage in computer hacking, allow-
ing them to access the vaults of various banks here in the United
States and worldwide and with a stroke of a key on a computer,
funnel off millions of dollars in a matter of seconds, we are going
to need more sophisticated methods of combating these criminals.
So that is something that I think we also have to focus on.

Mr. Franzese. Yes, sir. One other thing that I noticed is that
when the Government changed the gasoline law and they made the
responsibility of collecting taxes, they shifted it from the retailer at
the gas station level to the wholesaler, and they thought they were
going to put everybody out of business. But what I found is that
they advertised the fact that they were going to do that over sev-
eral months — they made it public — and by the time they changed
the law, we had a perfected scheme that made it even more lucra-
tive than the one we had before. So I think maybe some kind of
concealment in that regard might be helpful.

Senator COHEN. Do you think we can pass laws in a concealed,
covert fashion?

Mr. Franzese. I do not know. I do not know.

Senator Cohen. I think I have already answered the question.

Mr. Franzese. Yes.

Senator Cohen. Thank you, Mr. Chairman.

Senator ROTH. Thank you. Senator Cohen.

That will be all Mr. Franzese. Thank you.

Mr. Franzese. Thank you.

Senator RoTH. Our next witness is Anthony Casso, who is a
former underboss of the Lucchese organized crime family. Mr.
Casso is currently in Federal custody and cooperating with the
Government while awaiting sentencing.

Given the sensitive nature of Mr. Casso's position as a cooperat-
ing witness, we have agreed to limit his testimony to matters relat-
ing to Russian organized crime, and we would appreciate the co-
operation of all Subcommittee members in abiding by this under-
standing.

Mr. Casso was scheduled to testify openly; however, as a result
of last-minute concerns raised by the Department of Justice, Mr.
Casso will testify from behind a screen. It is my understanding
that members of the media have already been advised as to those
locations in the hearing room where cameras will and will not be
permitted during the course of the testimony in order to maintain
security.

Prior to the entrance of this witness, I direct that all cameras be
turned to face either to the ceiling or to the window side of the
hearing room. I will ask the Capitol Police whether all cameras
have been redirected. And I would then ask the Capitol Police to
secure the hearing room, and when that is done, the witness will
be brought in.

We will proceed in just a minute.

Mr. Casso, we swear all witnesses before the Subcommittee, but
I would ask that you remain seated while I administer the oath.

Mr. Casso, please raise your right hand. Do you swear or affirm
that the testimony you will give before this Subcommittee is the
truth, the whole truth, and nothing but the truth, so help you,
God?

I do.

Senator ROTH. Mr. Casso, are you represented by counsel today,
and if so, would counsel please identify yourself and your firm for
the record.

Mr. Brief. Matthew Brief, B-r-i-e-f, Brief, Kesselman, Knapp and
Schulman.

Senator RoTH. Mr. Casso, would you please proceed with your
testimony?

TESTIMONY OF ANTHONY CASSO,i FORMER UNDERBOSS,
LUCCHESE ORGANIZED CRIME FAMILY, ACCOMPANIED BY
MATTHEW BRIEF, LAW FIRM OF BRIEF, KESSELMAN, KNAPP
AND SCHULMAN

Mr. Casso. Good afternoon, Mr. Chairman and Members of the
Subcommittee. My name is Anthony Casso. Early in my life, I was
given the nickname of "Gaspipe."

I have been in jail since 1993, when I was arrested after being
a fugitive for almost 3 years. At that time, I was the underboss of
the Lucchese organized crime family. Ultimately, I decided to co-
operate rather than go to trial.

^The prepared statement of Mr. Casso appears on page 170.

As part of my deal with the Government, I pleaded guilty to a
72-count indictment, including murder, racketeering and extortion.
I have not yet been sentenced, and no promises have been made
to me for my testimony here today.

As part of my cooperation agreement, I told the Government
about my life of crime. I gave a deposition for use in an Israeli
trial, but I have not yet testified at a trial in the United States.
I will testify if requested by the Government at upcoming orga-
nized crime trials.

I have been involved with organized crime for more than 35
years, since I was a kid working on the docks in Brooklyn, New
York. When I was 21, I became associated with a guy named Chris
Furnari of the Lucchese organized crime family. Everyone knows
him as "Christy Tick."

Before I was arrested this time, I had only been in jail once. That
was in 1962 for 5 days, when I was convicted of running a book-
making operation on the docks and was fined $50. After that, I was
arrested several times for different Federal and State charges in-
cluding assault with a gun, selling stolen property, dealing heroin,
burglarizing a bank, and bribing State parole officers. In every
case, I was either acquitted, or the charges were dropped.

In the early 1970's, I met Vic Amuso. Then, in 1974, I became
a "made" member of the Lucchese family. Vic was "made" in
around 1977. At that time, "Tony Ducks" Corallo was the boss of
our family. But in 1986, Tony Ducks went to jail, so he had to
name a new boss. I became a "capo" in 1986.

After discussions within the family, Tony Ducks made Vic Amuso
the boss at the end of 1986. At the end of 1987, Vic told me I was
the new consiglieri. Then, in 1989, Vic named me the underboss of
the family. After Vic was arrested in July 1991, I ran the Lucchese
family as underboss while I was a fugitive.

In my position as a member of the Lucchese family, I came to
know individuals associated with Russian organized crime, which
is the subject I have been asked to testify about today.

In the mid-1980's, our family got involved with Russian orga-
nized crime in the gasoline business in Brooklyn. Italian and Rus-
sian organized crime made large amounts of money by working
scams to avoid paying taxes on gasoline. The Russians owned hun-
dreds of gas stations and controlled the supply and distribution of
gasoline. We provided them with protection they needed to main-
tain a cartel. We also helped them set up corporations to work the
scam.

The main Russian guy working with our family was Marat
Balagula. Marat was one of the early leaders of Russian organized
crime in Brooklyn. He made millions off the gas tax business, and
our family made a lot of money with him.

In around late 1986, another Russian named Vladimir, whose
last name I did not know at the time, came up to Marat in a Rus-
sian restaurant in Brighton Beach. Vladimir had recently arrived
in Brighton Beach from Russia. According to the Russians, the
word on the street was that he was a tough guy with his own crew.
Marat told me Vladimir pulled a gun, put it next to Marat's head,
told Marat that he was his new partner, and demanded Marat pay
him $600,000, or Marat would be dead.

Marat reached out to us and told us what happened. We agreed
to meet him the next day. When we went to Marat's house, we
found out that he was so scared that he had a heart attack but did
not want to go to the hospital. I remember seeing Marat in bed,
hooked up to all kinds of machines, refusing his doctor's orders to
go to the hospital. Marat's guy wanted us to kill Vladimir.

Since Marat was with our family, and especially since he was
such a moneymaker for us, this was not just a threat against
Marat; this was a threat against the Lucchese family as well. We
knew what we had to do.

Vic and I agreed that Vladimir had to be killed. We took this sit-
uation to Christy Tick, who agreed that we could have Vladimir
killed. Vic gave the hit to Joey Testa.

We asked Marat and one of his guys to get us some information
to identify Vladimir. One of Marat's guys got us his picture and li-
cense plate number. We had Marat call Vladimir and arrange to
have lunch with him at the same Russian restaurant in Brighton
Beach where Marat was threatened. After leaving the restaurant,
Vladimir was shot and killed.

I heard about the murder on the radio. Marat was very thankful
that we had gotten rid of this problem. We could not let somebody
try to put the squeeze on one of our family's biggest moneymakers.
After that, Marat did not have any more problems from any other
Russians.

I found the Russian organized crime groups to be very clever. We
knew the Russians were involved in heroin trafficking as well as
complicated scams involving forgery, and tax evasion in the oil and
gas business. The Russians were also very willing to use violence
to achieve their goals.

I will be happy to answer any questions you have about my
knowledge of Russian organized crime.

Senator Roth. Mr. Casso, at this time, do you know the man you
identified in your statement as "Vladimir" to be Vladimir
Reznikov?

Mr. Casso. Yes, I do.

Senator RoTH. And in addition to the murder you just described
in previous testimony, we have also been told of another murder
in Brooklyn of a Russian organized crime figure who worked with
La Cosa Nostra in the gas tax scam, that is, the killing of Michael
Markowitz who worked with the Colombo family. What were the
facts surrounding this murder, and describe any discussions you
had with anyone in the Colombo family regarding the Markowitz
murder?

Mr. Casso. I had discussions with the Colombo boss, Vic Orena
and a Colombo soldier, Frankie "The Bug" Sciortino.

Senator ROTH. Would you please speak into the microphone?

Mr. Casso. And I knew the Markowitz murder was going to take
place sooner or later, that they were working on planning on killing
Markowitz.

Senator Roth. Now, you testified that the Lucchese family pro-
vided protection to Russian organized crime in the gas tax scheme.
Specifically, what protection service did your family provide for the
Russians?

Mr. Casso. We provided that no one would go into their territory
and sell gas, and made sure people paid them the moneys they had
coming to them. And we would make it known that they belonged
with us, our group, and no one would bother them at all.

Senator Roth. Now, you testified that Marat Balagula was a
leading figure among Russian organized crime in Brooklyn. Why
would he contact you after he was threatened by another Russian?

Mr. Casso. Because Marat was with our family, so the proper
thing to do was just what he did, to contact us to handle it.

Senator ROTH. Where is Balagula today?

Mr. Casso. He is in Federal prison, I believe.

Senator RoTH. Did Balagula actually ask you to have Reznikov
killed, or simply to make him back off?

Mr. Casso. No; he wanted him killed. He was deathly afraid of
him.

Senator ROTH. Did you receive any payment for killing Reznikov?

Mr. Casso. None whatsoever.

Senator Roth. Was Joey Testa given any payment for killing
Reznikov?

Mr. Casso. None.

Senator Roth. Now, you testified about pleading guilty to a 72-
count indictment, including murder, racketeering and extortion.
How many murders?

[Pause.]

Mr. Casso. I believe 16.

Senator ROTH. I am sorry, I could not hear you.

Mr. Casso. I beheve 16.

Senator Roth. Was Joey Testa every charged with killing
Reznikov, and where is he today?

Mr. Casso. He was never charged with that murder, and he is
at a Federal prison also.

Senator Roth. Now, you stated that you are a "made" member
of the Lucchese family. Would you please explain what that means
and describe the initiation ceremony by which you became a
"made" member?

Mr. Casso. To become a "made" member, you have to be spon-
sored by a captain of the family, who would bring you to the boss
of the family and sponsor you to become a "made" member. They
have a ceremony with the boss, the consiglieri, and the underbosses
present at that time, and the captain who brings you in.

They prick your trigger finger and make it bleed, and then they
put it on a little piece of paper; they set it on fire, and you burn
it in your hand, and you repeat after them that you will never be-
tray La Cosa Nostra, or you will burn like the paper is burning in
your hand. And your life does not belong to you anymore; your life
belongs to them.

Senator Roth. Now, we know that the Luccheses were not the
only organized crime family involved with the Russians in the gas
tax business. What role did you play in getting other La Cosa
Nostra families involved in this gas tax scam?

Mr. Casso. Well, what we did was — the Colombo boss came to
see me, and we put it together — the Russians wanted to put it to-
gether so there was no more problem, the Russians would get paid,

and everyone would not steal each other's stops, and put every-
thing above board.

So the Genovese family had a branch in the gasoline business
also, with their own group of Russians. What I did was I reached
out for the Genovese family; I met with them, I met with their
underboss. I told them we wanted to have a meeting with the
Colombo family, the Lucchese family and the Genovese family, and
that the people we have running the gasoline business for us who
go up front and handle this every day with the Russians have a
meeting, and let us all make this one; we will put it together, and
everyone earns an equal share. And this is what we did.

We had this meeting. They agreed. We put it together. Being
that everyone agreed, we turned around, and we told the Russians
that they would have to pay a tax of a penny a gallon to us, to our
three families, which totalled maybe $500,000 a month. And they
agreed upon this; they were very happy because they could run
their business without having a problem from anyone.

So now we had three families involved. We had the Genovese
family, the Luccheses, and the Colombo family. And we ran like
that until about 1988. In 1988, the Gambino family wanted to get
involved. They also had a Russian group that they were working
with, but in a little smaller way, and that group was interfering
with what we put together.

So we took it upon ourselves — we had another meeting about the
Gambino family and if we were going to invite them into the cartel
that we put together, which we did; we made it a 4-way split. And
we had four groups — the Gambinos had a Russian group, the
Luccheses had their own Russian group, the Colombos had
Markowitz and his Russian group, and the Genovese family had
their own. We just combined it like that, and it was running
smooth.

Senator ROTH. Do you know if these kinds of agreements are still
in effect?

Mr. Casso. In the present, as far as I know, yes.

Senator RoTH. As far as you know, yes?

Mr. Casso. Yes.

Senator Roth. Are you aware of any other murders committed
by the La Cosa Nostra families on behalf of Russian organized
crime in connection with gas tax schemes?

Mr. Casso. I know there were a couple of murders with Russians
with the Gambino group, but I do not really know their names. But
I know a couple of murders took place with them, with their group.

Senator Roth. How would you characterize the Russians as busi-
ness partners?

Mr. Casso. They are good businessmen. They are good business-
men, and as far as money-wise, whatever you have coming to you,
they always made much more money than they gave organized
crime, than we got. But we always knew that.

Senator Roth. Senator Cohen?

Senator Cohen. Thank you, Mr. Chairman.

Mr. Casso, how did you get the name "Gaspipe"?

Mr. Casso. They have been calling me that since a very early
age, when I was a teenager. It was like a family name, and being
that I was the youngest out of 3 children, it stuck with me.

48
Senator COHEN. No association with your activities, the nick-

name?

Mr. Casso. None whatsoever.

Senator COHEN. You mentioned going to the hierarchy of author-
ity when Senator Roth asked you why Marat came to you as such.
You said he was just simply proceeding on a Une of authority, basi-
cally, that it was the proper thing to do. So you had your own orga-
nizational structure, since you were the enforcers, basically, or the
protectors of Marat, I assume.

Mr. Casso. Yes, right.

Senator Cohen. OK. Do the Russian criminal gangs have the
same sort of hierarchical structure as any one of the Italian fami-
lies as such — the Gambinos, the Colombos, the Luccheses? Do they
have capos, consiglieris, underbosses, boss — do they have anything
like that?

Mr. Casso. Not really.

Senator COHEN. So they are not structured?

Mr. Casso. Not in this country.

Senator COHEN. Not in this country.

Mr. Casso. No. They have gangs, or their own crews, the Rus-
sians, and mostly they are violent among themselves. This is why
we handled it. We would never want Marat to go and get someone
else, hurt someone else. We would rather him come, because maybe
there is no need to hurt someone else. Maybe this is a situation
where you can talk to someone and resolve the problem. But the
Russians are not that way; they are a little hot-headed, and they
are a little violent sometimes.

Senator Cohen. You indicated in your statement that they are
not afraid to use violence. Do you mean they are not afraid to use
violence against one another?

Mr. Casso. Right.

Senator Cohen. But they would not use violence against the
Lucchese family members?

Mr. Casso. No.

Senator COHEN. Why do you think they had to come to you to
get protection — they do not have enough muscle as such of their
own that they would simply say, "We don't need to pay you a
penny a gallon for our protection"?

Mr. Casso. It is not only protection; it is putting it together be-
cause, like Marat, he owned a couple of hundred gas stations. So
when we put the cartel together, now no one else was going to go
into his stations to sell gas a little cheaper, just to sell the gas, and
they start fighting amongst themselves again. So we held peace,
and, you know, protection goes more than one way.

Senator Cohen. And you indicated, finally, that the Gambino
family came in toward the tail-end of this arrangement because
they had a Russian connection as well. If another family comes
along with a Russian connection, will they keep expanding the
business?

Mr. Casso. No. To be honest with you, we just barely let the
Gambino family in.

Senator CoHEN. OK. That is all I have, Mr. Chairman.

Senator Roth. Thank you, Senator Cohen.

That is all that we require of you, Mr. Casso.

I would ask that all spectators remain seated until the witness
leaves the hearing room, and I would now direct the Capitol Police
and the Marshals to accompany Mr. Casso from the hearing room.

Our next witness is a Russian criminal currently incarcerated in
the United States. Again because of security concerns, the witness
will be testifying anonymously from behind a screen to protect his
identity.

As I said before, it is my understanding that members of the
media have already been advised as to those locations in the hear-
ing room where cameras will and will not be permitted during the
course of this testimony, in order to maintain security. Prior to the
entrance of this witness, I direct that all cameras be turned to face
either to the rear or to the window side of the hearing room. I
would ask the Capitol Police whether all cameras have been redi-
rected and whether the hearing room is secure so that the witness
may be brought in.

Please bring him in.

I would say to the witness that we swear all witnesses who ap-
pear before the Subcommittee. I would ask that you remain seated
while I administer the oath. Please raise your right hand.

Do you swear or affirm that the testimony you will give before
this Subcommittee is the truth, the whole truth, and nothing but
the truth, so help you, God?

Anonymous Russian Criminal. Yes, I do.

Senator Roth. Please proceed with your testimony, and pull the
microphone closer and speak up a little louder.

TESTIMONY OF AN ANONYMOUS RUSSIAN CRIMINAL i

Anonymous Russian Criminal. Chairman Roth, Members of the
Subcommittee, good afternoon.

I have been asked to testify today about Russian organized crime
in the United States, a problem which exists in several cities and
is likely to grow.

Let me explain the two reasons why I am able to speak on this
subject. First,' I grew up in Russia with people who are now leaders
of criminal groups worldwide, including here in the United States.
My father was a high-ranking officer in the Soviet military, and so
as a boy, I attended the best schools and socialized with the Com-
munity Party elite. My classmates included many future politicians
and criminal leaders.

Second, since 1992, I have lived in the United States and know
many of the Russian criminals who have settled here. Some of
these men, such as Leonid Zuza and Vyacheslav Kirillovich
Ivankov, or 'Taponchik," might be familiar to you. They are to me.
What you have to understand is that the well-to-do Russian com-
munity in this country is rather small and that the successful Rus-
sian criminals are part of it.

Through my business and social contacts, I was a part of this
community, but I have been in prison for the past year. I am serv-
ing a sentence for the possession of a firearm, which violated the
terms of my probation agreement. I am testifying behind this

^The prepared statement of the Anonymous Russian Criminal appears on page 172.

screen today because I believe that if my identity were known, I
or my family might be killed.

To understand Russian organized crime in this country, you
must first appreciate the situation in Russia. For the 2 years prior
to my arrival in the United States, I set up and ran the Moscow
branch of an American corporation specializing in investments and
international trade. We had a beautiful office 3 minutes from Red
Square.

Now, there are two things you must do to operate a business suc-
cessfully in Moscow. First, you must pay the right government offi-
cials under the table. Because I had known officials in Moscow
since I was a child, figuring out whom to pay was simple. To set
up our office so close to Red Square, I had to pay money to the
chief of government property in Moscow. Later, when we wanted
to open a supermarket in Moscow, I paid cash to the mayor of Mos-
cow, Yuri Luzhkov.

The second thing you must do to run a successful business is
purchase a "krisha," literally, "roof," in Russian, which has come to
mean protection. The more important you are, the higher the roof
must be. In Moscow, organized crime provides the roof.

Back in 1990, I could pay one organized crime group, say, 10 to
20 percent of our profits, and it would make sure that I did not
have trouble with any other groups.

There was crime, but at least it was orderly. Leaders of the
major organized crime groups in Moscow would meet regularly to
divide up opportunities. But as time went on, things got out of con-
trol. Fighting broke out among the organized crime groups in Mos-
cow, and several of the leaders were assassinated. Otari
Kvantrishvili, at that time the most powerful organized crime fig-
ure in Moscow and a friend of mine, was the first to be killed. Sev-
eral others followed. Most of these men were "vory v zakone," a
title reserved for powerful Russian godfathers.

As I said, things got out of control. I did not know which roofs
to pay and which were safe to ignore. Men were showing up regu-
larly and demanding protection money. I came to the United States
to escape this turmoil, and I can tell you that many criminals have
as well. Some are thugs who worked as enforcers or muscle in m
groups based in Russia. These men are responsible for much of the
violence that has taken place in Brighton Beach and other commu-
nities where Russians are concentrated in this country.

These men are also disorganized and looking for a leader to de-
vise a profitable criminal venture; someone like Ivankov. These are
dangerous men, but would be far more so behind a clever leader.

There is a difference between the Russian criminal who immi-
grates to the United States today and the one who came in the
1970's and 1980's. Fifteen years ago, Russian immigrant criminals
were on the whole smarter than today's lot. The schemes they exe-
cuted — Balagula's fuel tax evasion, the medical insurance fraud of
the Smushkevich brothers — made them millionaires. As I said be-
fore, most of the current wave of Russian ms is more prone to vio-
lence, but less resourceful than their predecessors. Whether or not
they left Russia with money, they will run out, and they will be
looking for ways to make more.

Russian organized crime in this country includes criminals from
both immigrant waves. They are involved in a number of illegal ac-
tivities, many of which I understand you have heard about earlier
today. These range from money laundering to extortion to car theft
to drug smuggling to insurance and gas tax fraud to murder. Some
of these crimes, I know about specifically.

For instance, they purchase cocaine in the United States for $20
to $30 a gram and sell it in Moscow for $100 to $150. In Moscow,
cocaine is a habit of the very rich, which means only three types
of people can afford it — newly-rich businessmen and politicians,
prostitutes, and criminals.

I know of murders as well. I knew Oleg Koratayev, the famous
Russian boxer who was shot and killed in Brighton Beach outside
the Arbat Restaurant. I know also that in the summer of 1994,
Leonid Zuza ordered the murder of another ex-boxer named
"Dmitry" because he refused to pay Zuza $17,000 he owed him. The
killer, a Russian named "Vladimir" who worked for Zuza shot
Dmitry on a patio outside a cafe on Melrose Avenue in Los Angeles.

I also know about extortion, which Russian criminals practice all
over the world, mainly on fellow Russians. I myself was approached
by a group of Russian criminals. They showed me pictures of my
family. They did not have to tell me why. What they meant was
that if I did not pay them money, my family would be harmed or
killed. They demanded tens of thousands of dollars. The leader of
the group came to my house one night to collect this money from
me, but I had a shotgun in my house, and he chose to leave.

Professional hockey players from the former Soviet Union are
also victims of extortion. And the extortion does not just happen in
Moscow or Kiev; it happens here. Alexander Mogilny, who plays for
the Vancouver Canucks, was threatened by Sergei Fomitchev, a
man I know. Fomitchev had helped Mogilny come to this country.
A couple of years ago, Fomitchev came to Mogilny, threatened him
and demanded money. Mogilny was scared and went to the police,
who caught Fomitchev before anything happened. Fomitchev has
ties to Russian organized crime groups.

Often, when a Russian criminal demands money, the threat is
not explicit, but it is clearly understood. Alexei Zhitnick, a
defenseman for the Buffalo Sabres, used to play for the Los Ange-
les Kings. He showed up at a Russian club in Los Angeles one
night with a new car, expensive clothes and beautiful women. He
was young and naive.

A man named Sasha, whom I know is connected with a Russian
criminal group, approached Alexei and demanded money from him.
Sasha was sending Alexei a warning, to make sure he thought
about his future in Los Angeles. Alexei did not go to the police. In-
stead, he went to a more powerful criminal group to take care of
the problem for him, which I understand it did.

I also know Vladimir Malakhov, who plays for the Montreal
Canadiens, but used to be with the New York Islanders. He was
approached in the National Restaurant in Brighton Beach by a
man who worked for Ivankov. The man demanded money from
Malakhov. He did not have to threaten him explicitly; the message
was clearly understood. Malakhov spent the next months in fear,
looking over his shoulder to see if he was being followed, avoiding
restaurants and clubs where Russian criminals hang out. Fortu-
nately, the problem went away when Malakhov was traded to Mon-
treal.

These are just a few stories to illustrate the illegal activities of
Russian organized crime in the United States. What we have here
cannot compare to the criminal activity and structure in Russia.
But what we have here is a problem that is growing. Just last
week, I heard that another "vory v zakone," or Russian godfather,
recently arrived in the United States. As I said, when leaders ar-
rive, the problems will multiply.

I am happy to answer your questions.

Senator Roth. You stated that there are companies in the Unit-
ed States exporting weapons and drugs to the former Soviet Union.
What kind of weapons are being shipped, and who is buying them?

Anonymous Russian Criminal. The most recent from the Unit-
ed States to Russian are shotguns and handguns, a lot of equip-
ment like bulletproof vests and walkie-talkie radios.

Senator ROTH. And who is buying them?

Anonymous Russian Criminal. These weapons are bought by
criminal groups and new businessmen.

Senator RoTH. Now, you testified about the money paid to gov-
ernment officials before you could open a business in Moscow.
Would an American businessman who wanted to set up an office
in Moscow also have to bribe the appropriate official?

Anonymous Russian Criminal. Yes; usually, it is more through
his business connections and his business partners.

Senator ROTH. You testified about the extortion in this country
of hockey players from the former Soviet Union. There have been
reports that players or their families have also been threatened
when they return home to the former Soviet Union during the off-
season. Is that correct?

Anonymous Russian Criminal. Yes, sir.

Senator ROTH. And in the case of the professional hockey player,
Alexei Zhitnick, why didn't he go to the police after he was threat-
ened?

Anonymous Russian Criminal. Because he does not trust pohce;
nobody trusts police in Russia. He would just go to a powerful
criminal group to protect him.

Senator RoTH. No trust in the police because of his past?

Anonymous Russian Criminal. Yes.

Senator RoTH. You testified that many of the criminals who have
arrived not long ago in the United States are more violent than the
older generation of criminals from the former Soviet Union. What
has caused this change?

Anonymous Russian Criminal. Because the new criminals who
are arriving in the United States are less educated, more violent
and disorganized, and they are ready for any job to make money.

Senator Roth. You also stated that you heard of a Russian god-
father who recently arrived in the United States. Who is the person
you are referring to?

Anonymous Russian Criminal. His name is Vladimir, nick-
named "Rezni"; he is a godfather and friend of Ivankov.

Senator ROTH. We have heard testimony that Ivankov is one of
the most powerful Russian organized crime figures to come to the
United States. Why did he come to this country?

Anonymous Russian Criminal. To my understanding, I think
there are two reasons. The first is to try to escape from Russian
law enforcement, and the second is because he does not want to be
killed, like a lot of his friends.

Senator ROTH. In your testimony, you observe that fighting
among organized crime groups in Russia is causing criminals to
come to the United States. What is causing this turmoil?

Anonymous Russian Criminal. They are fighting for power and
for territory.

Senator ROTH. Power and territory?

Anonymous Russian Criminal. Yes, sir.

Senator ROTH. Do Russian criminals located in different U.S.
cities communicate with each other, and is there communication
between criminals in Russia and those in the United States?

Anonymous Russian Criminal. Yes. Several groups in New
York and Seattle will fly and meet each other to look for business
opportunities. I know that Ivankov flew several times from New
York to Los Angeles and back.

Senator ROTH. How are Russian criminals able to get into the
United States?

Anonymous Russian Criminal. It is very simple. They probably
can buy phony passports for $200 or $300 and get visas at the U.S.
Embassy, probably, in the commercial section of the U.S. Embassy,
and come to the United States.

Senator RoTH. Those are all the questions I have. Prior to your
exit, again I want to direct that all cameras be turned to face ei-
ther to the rear or the window side of the hearing room. I will ask
the Capitol Police whether all cameras have been redirected.

I will now ask the Capitol Police and the Marshals to accompany
the witness from the hearing room.

Senator ROTH. Our final witnesses are a panel of local law en-
forcement officers who specialize in investigating Russian orga-
nized crime cases in the United States. One of these witnesses is
an undercover officer who will be testif3ring anonymously from be-
hind a screen and with the benefit of voice distortion to protect his
identity.

Again, it is my understanding that members have been advised
as to the locations in the hearing room where cameras will and will
not be permitted during the course of this testimony in order to
maintain security. So at this time, I direct that all cameras be
turned to face either to the rear or to the window side of the hear-
ing room and ask the Capitol Police whether all cameras have been
so directed.

The hearing room is secure, and the witness may be brought in.

The other witnesses on this panel are Detective Dan Mackey and
Ralph Cefarello of the New York City Police Department, and De-
tective William Pollard of the Los Angeles Police Department.

Gentlemen, it is a pleasure to welcome you. As you know, we
swear in all witnesses. Again, I would ask the witness behind the
screen not to stand for the swearing in; the others, I would ask to
please stand and raise your right hand.

Do you swear or affirm that the testimony you will give to the
Subcommittee today is the truth, the whole truth, and nothing but
the truth, so help you, God?

Mr. Cefarello. I do.

Mr. Mackey. I do.

Mr. Pollard. I do.

Anonymous Witness. I do.

Senator ROTH. Thank you, gentlemen. Please be seated

We will begin our testimony with Detective Mackey. Again, I will
ask you to summarize; your full statement, of course, will be in-
cluded in the record as if read.

TESTIMONY OF DANIEL MACKEY AND RALPH CEFARELLO.i
DETECTIVES, NEW YORK CITY POLICE DEPARTMENT

Mr. Mackey. Good afternoon. Chairman Roth, Senator
Lieberman and Members of the Permanent Subcommittee on In-
vestigations. My name is Detective Daniel Mackey of the New York
City Police Department. On behalf of myself and my colleague, De-
tective Ralph Cefarello, thank you for this opportunity to testify
about Russian/Eurasian criminals operating in New York City and
what is being done to stop them.

Previous speakers have given you international and national per-
spectives. Our view of this most serious crime problem is that of
working detectives, catching cases involving suspects and quite
often victims who were born in the former Soviet Union.

I work in a precinct detective squad that covers Brighton Beach,
Brooklyn. Since the late 1970's, Brighton Beach has become home
to an ever-growing number of Russian-speaking immigrants from a
variety of former Soviet republics, including Georgia, Azerbaijan
and Chechnya. The great majority are hardworking, law-abiding
citizens who have revitalized a neighborhood that has come to be
known as "Little Odessa." Brighton Beach Avenue is lined with
thriving markets, restaurants, nightclubs, clothing and video stores
that all cater to Russian-speaking customers. It is possible to go
about your daily business in Brighton Beach without uttering or
reading one word of English.

Unfortunately, Brighton Beach is also a hub for Russian-born
criminals with a well-deserved reputation for extreme violence.
Their criminal activities include vicious murders and assaults, ex-
tortion of Russian-owned businesses, prostitution, illegal gambling,
and a vast collection of frauds and schemes that ravage the econ-
omy, causing government, businesses and consumers millions of
dollars.

We have encountered staged motor vehicle accidents in which all
participants claim back and neck injuries, then file insurance

'The prepared statement of Mr. Mackey and Mr. Cefarello appears on page 179.

claims for medical services provided by Russian-operated medical
groups also believed to be in on the scam. Additionally, we have,
in joint operations with the United States Secret Service, disman-
tled sizeable cellular phone-cloning networks run by Russian/Eur-
asian nationals.

While we have had some success, it is often difficult, and frankly,
quite frustrating to investigate these illegal activities — for the
same reasons it has always been difficult and frustrating to inves-
tigate crimes committed within a closeknit immigrant community.
To a large extent, the criminals count on language as a barrier as
well as a presumed reluctance on the part of fellow immigrants to
cooperate with the police, especially if the police in their homeland
were viewed as agents of an oppressive regime.

The NYPD has relatively few police officers and investigators
who are fluent in Russian. The language barrier may hinder an in-
vestigation in several ways. The first officers or detectives to arrive
at a crime scene may have to scramble for translators. And it is
tougher to field traditional undercover operations used in public
morals cases.

For example, Russian-run brothels are extremely lucrative but do
not cater to non-Russian clients. We have attempted to use under-
cover "Johns" who do speak Russian, but even they require an in-
troduction from a credible go-between, which has proven difficult to
obtain.

We have investigated numerous cases involving the extortion of
Russian-owned businesses, sometimes referred to as "window in-
surance" or "protection money." It is not uncommon for complain-
ants in these cases to cooperate only up until the time an arrest
is made, then refuse to follow through on the prosecution.

When the crime is murder, witnesses willing to cooperate are
also scarce. At this time, I would like to introduce Detective
Cefarello, who will provide a brief overview of our experience with
murder investigations of Russian crime figures.

Senator Roth. Detective Cefarello?

Mr. Cefarello. Good afternoon. My name is Detective Ralph
Cefarello. I am currently assigned to a new citywide investigative
unit specifically created to combat the criminal activity you are
hearing about today.

In the past 15 years, there has been a total of 42 murders and
24 attempted murders in New York City known to be linked to
Russian/Eurasian criminal organizations. Many of the murder vic-
tims served time in prison in the former Soviet Union or were
known to engage in criminal activity there. Several were accom-
plished athletes in contact sports such as wrestling, boxing, or one
of the martial arts. Commonly, the motive for these murders in-
volved disputes over profits from illegal activities and turf battles
over extortion rights.

Witnesses in these cases were often less than forthcoming. Take,
for example, the murder in Brooklyn of a former Soviet heavy-
weight champion. This individual, who was involved in strong-arm
extortion and narcotics trafficking, was shot and killed in front of
a Russian nightclub on Brighton Beach Avenue. He had been
among some 75 guests at a private party. His killer had also been
present during the festivities.

We talked to everyone who had been present at the party. The
story was the same, interview after interview: No one saw or heard
anything. No one could identify the victim. No one could identify
his killer.

Despite these types of investigative obstacles, we have been able
to clear 15 of these 42 homicides, and we expect to prosecute those
responsible for numerous other murders pursuant to active RICO
investigations with Federal prosecutors.

It is important to note that cooperation among local, State and
Federal law enforcement agencies remains an essential ingredient
of any successful strategy to address this problem. NYPD detec-
tives meet regularly with representatives of other agencies. These
information-sharing sessions have proven quite productive.

Finally, thank you for your interest in a crime problem we are
working so hard to eradicate. We already enjoy the leadership and
support of Mayor Rudolph W. Giuliani and Police Commissioner
Howard Safir. Any additional Federal resources you could send our
way would be greatly appreciated and well-used to permanently
stunt the growth of Russian organized crime criminal activity on
our shores.

Senator ROTH. Thank you, Mr. Cefarello.

Mr. Pollard?

TESTIMONY OF WILLIAM POLLARD,i DETECTIVE, ORGANIZED
CRIME INTELLIGENCE DIVISION, LOS ANGELES POLICE DE-
PARTMENT

Mr. Pollard. Good afternoon, Senator Roth, Members of the
Subcommittee. I am Detective William Pollard, Los Angeles Police
Department, Organized Crime Intelligence Division.

I will present abbreviated remarks regarding organized crime in
the Los Angeles area, and I request that my full written statement
be entered into the record.

"Russian organized crime" is a term covering more than 150 eth-
nic backgrounds and 120 languages. The common denominator is
the Russian language, spoken by most due to the Soviet rule for
70 years or so.

Historically, in the greater Los Angeles area, the problem started
in the mid-seventies when the Soviets released Russian Jews and
Armenians, and they came to the United States as refugees. In
these groups of emigres were criminal elements that, upon arriving
here, continued their criminal activities. In fact, some of the
emigres who were admitted as Jewish refugees were not even Jew-
ish and had spent time in Russian prison. At the same time, Arme-
nian refugees were also arriving in the United States with a simi-
lar pattern, having a percentage of criminals.

It is also believed that the Soviet Union used the refugee pro-
gram to send KGB agents and operatives into our population.

Since the breakup of the Soviet Union, we see a much more di-
verse ethnic background in the criminal element coming here. Cur-
rently, the greater Los Angeles area has the second-largest Rus-
sian-speaking population, excluding Armenians, in the United
States and the largest population of Armenians outside of Armenia.

' The prepared statement of Mr. Pollard appears on page 182.

The city of Glendale, which adjoins the city of Los Angeles, finds
that 25 percent of their population is Armenian, with half of those
being Soviet or Russian Armenian.

Along with our resident populations, there is a growing number
of tourist or "shadow people," transient individuals who come and
go, many times engaging in criminal activities. While in the past,
no real structure was observed in the Jewish or Armenian groups,
today, investigators from the Los Angeles Police Department and
the Glendale Police Department see a growth of structures in sev-
eral Armenian criminal groups.

Other Russian groups that still do not appear to have a structure
in the United States seem to be arms of structured groups in the
former Soviet Union. This lack of observable structure is the main
reason why law enforcement in Southern California did not see or-
ganized crime as the upcoming problem it is today.

Over the years, what were first seen as career-type criminals
committing extortions on their own and frauds against our society,
with a small amount of violence, now commit very sophisticated,
major fi^auds and a high degree of violence. Much of this is due to
the background of the new criminal who may have been a KGB
agent, a police officer, a politician, or a well-educated professional
in his country.

A few years ago, the Glendale Police Department arrested a
former police chief of the city of Yerevan, Armenia's capitol, on
charges of extortion, rape, and kidnapping.

Some examples of the types of criminal activities that have been
investigated by law enforcement in the greater Los Angeles area
are the following. In 1983, a Russian businessman became indebted
to organized crime figures for $50,000 at a 30 percent interest rate.
For the next 8 years, he had to borrow another $70,000 to make
payments. During that time, he repaid $480,000. In 1991, he and
his family were being threatened by organized crime figure for re-
payment, and he finally came to law enforcement for help. The sus-
pects were arrested, and we had two convictions in that case.

Nineteen ninety-one was also the year that the Smushkevich
brothers were arrested on the basis of a task force investigation in-
volving Federal, State and local agencies. The medical fraud in-
cluded false billing through mobile medical laboratories and doc-
tors' offices. This was the largest medical care fraud case in U.S.
history. Fraudulent billings were in excess of $1 billion.

In 1992, a few Russian visitors to Los Angeles who had been
made indentured servants in a scheme to commit fraud with checks
and credit cards wished to return home to Russia. The Russians
running the scheme would not allow the visitors to leave and held
their passports and visas. An argument ensued, and the visitors
murdered the two Russian captors. Los Angeles County sheriffs re-
sponded to a call from the neighbors regarding a car in the drive-
way with the motor running for a long period of time and discov-
ered the suspects attempting to eliminate identification on the bod-
ies by removing the fingertips and removing the bullets from the
bodies.

In 1994, a group of Armenians who had been extorting, kidnap-
ping and in general terrorizing the Armenian community for the
past 13 years were arrested and convicted.

In 1995, a task force of the Los Angeles Office FBI, IRS, Depart-
ment of Defense, California Department of Justice, the Los Angeles
Police Department and the Long Beach Police Department inves-
tigating fuel tax fraud that also involved using fraudulent IRS
forms, rigging fuel pumps and blending additives to extend fuel
concluded by arresting 25 individuals on various RICO violations.
The ringleader, Joe Mikhailian, was identified as the "godfather" of
the Armenian mafia in Los Angeles.

Current joint investigations are underway with the Los Angeles
Police Department, the Glendale Police Department, and the FBI
on a number of murders involving the garment industry. There
have been 5 murders, 5 attempted murders, shootings, bombings
and extortions in the Los Angeles-Glendale communities that are
believed to be related to organized crime in the garment industry.
Of all of these crimes, there has only been one conviction for mur-
der.

There are numerous investigations by several agencies into ongo-
ing medical frauds, many of which have spread into other States
as pressure is applied in the Southern California area. These
frauds seem to be based on staged or manufactured auto accidents
and involve not only doctors, but attorneys as well.

Law enforcement is trying to combat the rapidly growing prob-
lem of Russian organized crime by working together on cases and
forming task forces needed to solve the problem. In 1991, the Los
Angeles Police Department, the Los Angeles FBI, and the Los An-
geles County Sheriffs Office organized a regional meeting of law
enforcement professionals known as the Soviet Organized Crime
Intelligence Team, or "SOCIT." The California Department of Jus-
tice has been taking information from all sources and building a
database on Russian organized crime to benefit law enforcement in
tracking the problem. It also has been instrumental in organizing
two more information-sharing groups in Northern California.

Some of the problems for law enforcement in dealing with the
new criminals include a lack of trust in the community of law en-
forcement based on their experiences in the old country. Immi-
grants are subjected to threats from mafia members and feel that
they have nowhere to turn. Law enforcement must make inroads
into the community to build trust. They must also interact with
other agencies on the local. State, national and international levels
to counteract the highly mobile, violent Russian criminals who
today deal with any other crime group in the world to continue
their criminal enterprise.

Prosecutors need to be educated on the subject and make every
efibrt to prosecute every case, no matter how trivial it may seem.
There also needs to be an international database open to all law
enforcement. Today, with the rapid growth of this problem, it is im-
perative that agencies and departments find resources for training,
manpower and equipment to effectively combat the problem.

This concludes my statement. I will be happy to answer ques-
tions.

Senator ROTH. Thank you, Mr. Pollard.

We will now hear from the undercover police officer. Please pro-
ceed.

TESTIMONY OF AN ANONYMOUS UNDERCOVER POLICE
OFFICER 1 FROM ANOTHER CITY

Anonymous Witness. Senators, I welcome the opportunity to ap-
pear before your distinguished committee.

I was born and raised in Russia. I emigrated from Russia to the
United States in the 1970's. I have been a law enforcement officer
for more than 15 years. I have served in different capacities — uni-
formed patrol, homicide detective and narcotics detective.

During the past 2 years, I have been involved in numerous Rus-
sian organized crime investigations.

Due to the fact that I am involved in a number of extremely sen-
sitive investigations, I am testifying anonymously in order not to
jeopardize these cases or the safety of others.

As I said earlier, I grew up on the former Soviet Union. I was
raised under the Communist system, and I believe that I know the
thinking of the people who were brought up in that system.

I am very active in the Russian emigre community in the city in
which I live. I attend most of the gatherings of the emigres and
continue to be very much in touch with the Russian emigres and
their culture. I receive and read most of the literature that is pub-
lished in the Russian language in both the former Soviet Union as
well as here in the United States.

Now I would like to touch on the subject of the difference be-
tween the cultures in the Republics of the former Soviet Union and
the United States.

During the Communist regime, for many people in the former
USSR, the moral values accepted in a free society were "destroyed,"
maybe with a few exceptions. Russian people grew up with the un-
derstanding that stealing something from their place of employ-
ment is not a crime — maybe because one was not stealing from a
friend but rather from a system.

They also grew up with the understanding that the rules were
made to be bent or bypassed. That mentality, philosophy and up-
bringing explains why some of the Russian emigres, many of whom
were educated, family people, got involved in white collar-type
criminal activity here in the United States.

Up until perestroika, the method by which success was judged in
the USSR was the level of a person's education. Doctors, engineers,
teachers and scientists were all accorded a somewhat higher status
in society. Wealth was not a factor as a worker in a factory was
making as much money as a doctor did. And the people who did
make money in the underground economy or black market oper-
ations were concealing their wealth.

After perestroika, this situation was reversed, and the wealthy
people rose to the top of society. With perestroika, organized crime
flourished in Russia.

Now I would like to explain how these criminal groups emerged.
There were a number of young people who were energetic but im-
patient or unable to build up their own businesses over a period
of time. These people started to form criminal groups based on
their affiliations with neighborhoods, cities, or ethnicity. The
groups were led by either professional criminals or people with

^The prepared statement of an Anonymous Undercover Police Officer appears on page 197.

leadership abilities and similar interests. These groups started to
prey on the new Russian business society. They continued to grow,
and some of the criminal organizations are now several thousand
members strong. They would extort money, kidnap people for ran-
som, and organized collection agencies which used very unorthodox
methods.

Another new industry began to emerge, that of "murder for hire."
Business people would use these hired killers to wipe out their
competition and thereby give a lesson to others: Do not fool around
with my company or the area that I am operating in.

Information has been developed that many of these murders
were committed in Russia by people with extensive military back-
grounds. These actions forced the business people to each begin
looking for "protection." And a new and very profitable business,
called "krisha," meaning "roof in English, came into being.

Very few businesses in Russia could survive without this protec-
tion. Up to 50 percent of their income was diverted by the legiti-
mate businesses to criminal organizations in return for this protec-
tion.

With the new ability to travel freely, we see Russian criminal or-
ganizations establishing their roots, their ties, here in the United
States of America.

Another important point is that during the Communist regime,
there was in effect a system where a privileged class of the Com-
munist government officials was developed. There was almost a
closed society of the Communist bureaucracy, and it was nearly im-
possible to become a part of it unless one was well-connected.

However, with the dismantling of the Soviet Union, these people
remained in office, but no longer under the Communist system
which guaranteed them a better life. They began to see that money
is the criterion on which people were judged; yet they had the
power to issue licenses, permits, valuable government contracts, set
customs duties on goods imported into the former Soviet Union, or
set standards for the export of Russia's valuable commodities — for
example, its natural resources.

Many of these government officials began to take advantage of
their positions due to this perception. They or members of their
families became "partners" in business enterprises or in effect
"sold" their power and authority.

Information developed shows that many Russian government of-
ficials, working on a modest salary, amassed vast sums in this
fashion. These same corrupt officials put the profits from this activ-
ity in bank accounts all over the world and purchase real estate or
other property in various countries, including the United States of
America.

In addition, many of the former intelligence and law enforcement
agents and leaders perceived that they were "on the bottom," so to
speak, of the new and emerging wealthy Russian society. Their
services and knowledge became a valuable commodity to the
emerging criminal groups.

In speaking with a number of sources of information over the
past couple of years, I have learned that individuals and businesses
affiliated with the former Soviet intelligence organizations are
being used by the Russian organized crime groups all over the

world, including in the United States. While I cannot go into the
specifics of this, I can say that the information developed shows
that the former intelligence officers are working in league with
Russian organized crime and making huge profits in the process.

Among the strongest Russian criminal organizations which are
operating today are the following groups. The Izmailovskaya orga-
nization, the Solntsevskaya organization, the Podolskaya organiza-
tion, Balashikhin, Baumanskaya, Chechen criminal organizations,
Dagestani, and the list goes on. This is just to name a few.

We have been able to link several murders which have occurred
in the United States to Russian organized crime groups. Informa-
tion developed shows us that Russian criminals were open to co-
operation with other criminal groups, for instance, Italian Amer-
ican criminal groups.

We also developed information about increasing cooperation be-
tween Russian organized crime and Colombian drug cartels. The
Russian organized crime groups are believed to be heavily involved
in the laundering of the profits of these Colombian drug cartels.
They have also established a continuous flow of cocaine from Co-
lombia to Eastern Europe and Russia. It has even been recently re-
ported in newspapers that drug dealers in Colombia are using
former Soviet military transport aircraft to move quantities of co-
caine.

To describe a typical activity of Russian organized crime in the
United States, I can bring the following example. A hardworking
Russian businessman operating in a heavily-populated Russian
area of a major city is visited by several males. They tell the busi-
nessman that, either for a certain percentage of his business or
regular payments, they will "protect" his business. If the business-
man replies that he does not feel that he needs that protection, in
the near future, strange things will happen to his family or him-
self. Robberies may take place at his establishment. Acts of vandal-
ism will occur. Threatening phone calls will be received, and/or vio-
lent acts against him or members of his family will take place.

The same people will visit the businessman again and, now con-
vinced that he does need protection, the businessman will start
paying.

Senators I have been asked by your staff whether I have any ad-
vice for the Subcommittee on how to combat Russian organized
crime. I would like to make a few suggestions that would come not
only from me, but from law enforcement personnel with whom I am
working on Federal, State and local levels.

Formal task forces should be established in major metropolitan
areas, consisting of Federal, State and local officers. What these
task forces could do is actively gather information about Russian
organized crime activity in their cities and conduct investigations
against these subjects. The task forces should establish liaison con-
tacts with law enforcement agencies throughout the world, since
Russian organized crime groups operate on a global level.

One of the most glaring gaps in the fight against Russian orga-
nized crime is the lack of an extradition treaty between the United
States of America and the former Soviet Republics. This has en-
abled many Russian criminals associated with organized crime and
sought as fugitives by Russian authorities to seek refuge in the

25-049 0-96

United States. By the same token, Russian criminals who have
been committing crimes in the United States have subsequently
left for Russia and found safe haven there.

What could be accomplished by addressing these matters, how-
ever, is a slowing down but not a complete halt to the growing
problem of Russian organized crime in the United States of Amer-
ica.

I thank you again for the opportunity to appear before your dis-
tinguished Subcommittee.

Senator ROTH. Thank you.

Senator Nunn?

OPENING STATEMENT OF SENATOR NUNN

Senator NuNN. Mr. Chairman, I had to attend a funeral this
morning and regret that I was unable to be here. I appreciate your
hard work and the work of the staff and all the witnesses who have
testified. I do not want to interrupt the flow, so I will just put my
opening statement in the record if that could be done, and I will
follow your questions.

[The prepared statement of Senator Nunn follows:]

PREPARED OPENING STATEMENT OF SENATOR NUNN

Thirty-three years ago this September, Joseph Valachi testified before this Sub-
committee. His unprecedented testimony gave Congress and the American people
their first insider's view of a criminal organization called the "La Cosa Nostra, the
LCN, or as Valachi called it — "Our Thing." This morning, the Permanent Sub-
committee on Investigations continues in that same tradition by holding the second
in a series of Senate hearings exploring the activities of a new crime group operat-
ing within our country that comes from the territories of the former Soviet Union —
a crime group that many have compared to the La Cosa Nostra in its proclivity to-
ward violence and mayhem.

As we will hear from our distinguished witnesses this morning, crime, and par-
ticularly organized crime, has become one of the most dangerous forces to arise from
the collapse of the Soviet system. It has cast a shadow over efforts to achieve mar-
ket reform and democratization in Russia and the other independent republics, and
it may ultimately pose a threat to peace not only in that region of the world, but
in others as well. As such, organized crime in the former Soviet Union is fast becom-
ing not only a law enforcement nightmare, but a potential national security night-
mare as well.

Hearings last month concerning a year-long probe that I directed into the pro-
liferation of weapons of mass destruction, underscores these concerns. Numerous
witnesses testified about the frightening possibility of organized crime in Russia, or
elsewhere, obtaining nuclear weapons or fissile material. Although, to date, none of
the experts contacted by the Minority staff had evidence of direct organized crime
involvement in such activity, all expressed deepening concern that such an event
was becoming more plausible.

Today's hearing is obviously not the Subcommittee's first exposure to the topic of
organized crime in the former Soviet Union. As one of my staff reminded me re-
cently, 13 years ago, one of his first interviews for the Subcommittee was with the
Philadelphia police and dealt with "Soviet" organized crime members infiltrating the
jewelry business in that area. However, it was not until the demise of the Soviet
regime that this phenomena took on greater dimensions.

In May of 1994, under my direction as Chairman, the Subcommittee explored the
activities of Russian organized crime both here and in Europe. At that time, the
Subcommittee in an unprecedented move, brought together a distinguished panel of
international law enforcement experts consisting of Louis Freeh, Director of the
Federal Bureau of Investigations, Hans-Ludwig Zachert, President of Germany's
Bundeskriminalamt, and General Mikhail Yegorov, First Deputy Minister of Rus-
sia's Ministry of Internal Affairs and the Head of Russia's Organized Crime Control
Department. That hearing represented the first time that such high-ranking law en-
forcement officials from these countries had testified together before the U.S. Con-
gress. Their testimony was also unique in that it described a problem faced by all

three countries — the phenomenal growth of organized criminal activity in the terri-
tories of the former Soviet Union.

Our 1994 hearings showed that unlike the first half of this century when the La
Cosa Nostra migrated to this country and successfully infiltrated our society without
any major law enforcement reaction, today law enforcement officials on both con-
tinents are concerned and doing something about this problem. I am encouraged by
this response from American law enforcement in general, and more specifically, the
FBI, Customs Service, Internal Revenue Service, and other State and local law en-
forcement agencies have shown in confronting Russian organized crime before it
took root. I particularly want to praise the leadership of FBI Director Freeh who
has called for greater attention to this important phenomena. Director Freeh along
with the others have obviously learned from the mistake we previously made in ig-
noring the La Cosa Nostra until they were too well entrenched in our society.

Today's hearing builds upon what we learned in 1994. We will focus our attention
almost exclusively upon Russian organized crime activities within our own country's
borders. Our purpose this morning is to determine the true nature of Russian orga-
nized crime in America and the significance of this criminal phenomena. More spe-
cifically:

• How many members does it have, how is it organized, who are its leaders?

• How big is the Russian organized crime problem in comparison to other crime
problems such as gangs in Los Angeles, drug trafficking in Miami, the mafia
in New York?

• How extensive are its ties to other organized crime groups both here and
abroad?

• How wealthy is it? What are its ties to financial institutions both here and
abroad?

• What are its ties to criminal, government and intelligence elements of the
former Soviet Union?

Hopefully, we will be able to answer many, if not all, of these questions. At the
minimum, I expect today's hearings will help us all to sort out what is credible and
what is not; what is the real and what is fictional; and, what is the threat from
what is merely sensationalism. This latter point is clearly important in light of the
comments of the learned Chairman concerning even the term "Russian organized
crime".

Clearly, I join with Senator Roth in decrying those who would tarnish every Rus-
sian or every emigre from the former Soviet Union with that term. It has become
merely a term of convenience within the press and public as shorthand for criminals
coming from any one of the many new states created out of the former Soviet Union
or even from the new republics of Eastern Europe. Moreover, it is equally unfair
to paint with a broad brush the vast majority of former Soviet citizens currently re-
siding in America who are law-abiding, hard-working and extremely loyal members
of our society. In fact, as Senator Roth has already noted, these new immigrants
to our country are more likely than any others to be the victims of this criminal
activity. As with the history of all other ethnic-related organized crime groups in
our country, the criminals usually prey upon their own ethnic community, hoping
to profit from their fellow countrymen's ignorance and/or mistrust of their new coun-
try's laws and government.

It is important that we keep this in mind as we listen to today's witnesses. It is
essential that we honestly assess the threat from Russian organized crime so that
we correctly balance our government's response. We must be judicious in our re-
sponse so that we do not trample upon long-cherished democratic principles.

In closing, I wish to thank the efforts of Senator Roth and his staff in preparing
today's hearings. I commend their efforts and once again congratulate Senator Roth
on his leadership in this area of utmost concern to our country.

Senator ROTH. Well, thank you, Senator Nunn. I want to say
once again that we appreciate your cooperation and that of your
staff in this investigation.

Detective Mackey, you stated that Brighton Beach is a hub for
Russian-born criminals. Why is this true?

Mr. Mackey. That is correct. Chairman Roth. Brighton Beach
has traditionally been the first stop for new former Soviet Union
emigres, like the Chinatowns or Little Italys or the like in New
York or other big cities. It is a small, oceanfront, tightly-knit com-

munity where networking, connections and ethnic aUiance make
Brighton Beach the ideal place to ply their trade.

The prevailing attitude of not wanting to be labelled a
"stukatch," or informant, an attitude which is a residue of life in
the former Soviet Union, makes Brighton Beach convenient for
criminals. An example of this is indicated by pen registers or wire-
taps of investigations outside of New York jurisdiction which lead
back to Brighton Beach.

No matter what agency or its jurisdiction, the tentacles of Brigh-
ton Beach are present.

Senator RoTH. Has Brighton Beach changed notably since the
breakup of the Soviet Union and the resulting influx of Russian im-
migrants?

Mr. Mackey. Yes, Mr. Chairman. Changes in Brighton Beach
that we have been observing include younger criminals in Brighton
Beach with a propensity toward intimidation, with intelligence in-
dicating that they have been sent here to specifically engage in
criminal activity.

Additionally, we have seen more violent acts than in the past, as
indicated by a recent double homicide in which both victims were
totally dismembered.

Intelligence indicates that many of these criminals are transient,
with the ability to move about freely.

Senator ROTH. You indicated that they were sent here; do you
mean they may continue to have ties with criminal elements back
in Russia?

Mr. Mackey. That is correct. Chairman Roth. We have had intel-
ligence briefings that indicate that these criminals plying their
trade in Brighton Beach still travel back and forth freely between
Brooklyn and the former Soviet Union.

Senator RoTH. Detective Cefarello, Anthony Casso testified ear-
lier today about the killing of Vladimir Resnikov outside of the
Odessa Restaurant in Brighton Beach. Are you familiar with this
murder, and if so, has anybody been charged with this crime?

Mr. Cefarello. Yes, Chairman Roth, I am familiar with the
murder, and as of this time, no one has been charged in that mur-
der.

Senator ROTH. Mr. Casso also testified that Resnikov was killed
by Joey Testa of the Lucchese organized crime family. Is this a
plausible explanation of the murder?

Mr. Cefarello. Yes, it is plausible. The murder investigation
show witness statements and forensic and some individual state-
ments that make that plausible, yes.

Senator RoTH. You testified that there have been more than 40
murders

Mr. Cefarello. Forty-two, yes.

Senator Roth [continuing]. Forty-two — in New York City linked
to Russian organized crime. What is the explanation as to why
there have been so many murders? Have you found any recurring
patterns or methods used by the Russians to commit these mur-
ders?

Mr. Cefarello. The prevalent weapon of choice used by Rus-
sians is usually a semiautomatic handgun, the high-powered semi-
automatic handguns, although "streetsweeper" shotguns and auto-

matic machine pistols have been used. Several victims have been
brutally stabbed, as Detective Mackey stated, and two were totally
dismembered.

As far as why they occur, I would say that probably as in any
other organized crime organization in the past, it would probably
have a lot to do with greed and someone trying to take over your
territory or someone trying to get some of that tax money that you
heard about earlier from the gas scams. With millions and millions
of dollars passing hands, someone is going to get killed in between.

Senator Roth. Do you think this is still continuing?

Mr. Cefarello. From what I have heard today and from what
I have heard before, yes.

Senator ROTH. Detective Pollard, it is hard to see you because of
the screen. You testified about "shadow people" who are hired by
Russian organized criminal groups to travel to the United States
to commit murder and other violent crimes. Can you provide us
with examples of crimes in the Los Angeles area that you suspect
were committed by these "shadow people"?

Mr. Pollard. Yes, Senator. Probably the best example would be
the Carole Little murders, which is the garment industry case that
I referred to. In that case, there have been 5 murders, 5 attempted
murders, and numerous other violent crimes. It is well-believed
that most of these, or a good percentage of them at least, have been
done by these "shadow people" or visitors coming in. It leaves de-
tectives with dead-ends when they are investigating.

Senator ROTH. Did they go back to Russia afterwards — is that
what happens?

Mr. Pollard. Yes. The information we get from the street
sources indicates that they will come in on a flight from Moscow
to Los Angeles on a Saturday; there is another flight from Los An-
geles to Moscow on Wednesday. They will come in on one of those
flights, do whatever they have been hired to do, and be out on the
next flight.

Senator RoTH. In your statement. Detective Pollard, you discuss
the problems of L-1 visa fraud enabling Russian criminals to enter
the United States. How serious a problem is this, and what is
being done, if anything, to help solve it?

Mr. Pollard. That problem is a serious problem right now.
There is an ongoing investigation by the State Department that we
are assisting with. The scenario on it is that a Russian crime figure
will go to the Moscow Embassy and obtain a B-1 or B-2 visitor
visa, will come to the United States, set up a storefront or a mail-
drop-type business, write himself a letter of invitation, saying that
he is needed for some work in that business, return to Moscow with
the letter, take it back to the Embassy, trade in his visitor visa for
a work visa and come back; he will then write more letters to more
people in his organization in Russia and have them come here.
They will use that storefront business to launder money and to
cover whatever their criminal enterprise is.

Like I said, the State Department has an ongoing investigation
nationwide on that; local and State agencies are assisting with
feeding information and helping as they can.

Senator ROTH. I was struck by a line in your statement where
a Russian source said, "The only thing I fear is deportation, and

you won't do it." The Subcommittee has investigated the problem
of criminal aliens, and the Senate recently adopted an amendment
that I cosponsored to simplify and expedite the deportation of
criminal agents.

Do you believe that deportation is an effective weapon?

Mr. Pollard. Yes, sir. I think it would be a highly effective
weapon if we could use it. The problems that have come up in the
past as far as using it, especially with the refugee statuses, have
been a real hindrance. With the changes that have been made and
should be made in the future, I think it would be a very effective
weapon.

Senator Roth. I would now like to turn to our undercover officer.
You discussed several organized crime groups based in the former
Soviet Union. Do any of these groups operate in the United States,
and what crimes do they engage in?

Anonymous Witness. Yes, Senator. We have developed informa-
tion that the following Russian organized crime groups have estab-
lished their ties in several major metropolitan areas in the United
States. They are the Izmailovskaya organization, the Solntsevskaya
organization, the Chechen criminal organization, the Taganskaya
criminal organization, and there are others that are still under in-
vestigation.

Senator ROTH. Now, as a typical example of Russian organized
criminal activity, you described the extortion of a Russian business-
man who, after he is threatened and his business vandalized, de-
cides to pay. If he were to ask you, "What should I have done?" how
would you have answered him?

Anonymous Witness. Senator, that is an extremely difficult
question to answer. As a law enforcement officer, I would suggest
that the businessman should file a complaint with the appropriate
law enforcement agency. However, putting myself in the position of
the Russian businessman, and understanding the limitation of law
enforcement to protect the individual and his family on a continu-
ing basis, I would suggest that he peacefully resolve this matter by
cooperating with those who approached him.

Senator ROTH. So in other words, to put it briefly, as a friend,
you would tell him to pay?

Anonymous Witness. Right.

Senator ROTH. Let me ask you this question. You have been a
police officer, as I understand it, for several years in this country.

Anonymous Witness. More than 15.

Senator Roth. How do you see the activities of the Russian
criminal groups changing over that period of years?

Anonymous Witness. It is becoming well-organized, well-funded;
they are operating with huge amounts of money. They are becom-
ing more and more sophisticated.

Senator ROTH. In other words, they are becoming more struc-
tured, better organized — more effective?

Anonymous Witness. More effective and integrated into the
American business community.

Senator Roth. Do you see them investing in a major way in le-
gitimate businesses?

Anonymous Witness. Yes, Senator.

Senator ROTH. Let me ask all of you officers this question. You
are the first line of defense against Russian organized crime. Are
you satisfied with the level of cooperation you are receiving from
State and Federal agencies?

Mr. Mackey?

Mr. Mackey. Chairman Roth, as a representative of the New
York City Police Department, I can honestly say that although
interagency cooperation does exist, there is certainly need for im-
provement.

We have had homicide investigations stymied because of parallel
investigations involving the New York City Police Department and
other agencies, where we are interested in solving a homicide, and
they have their own agenda, and the forthrightness or the passing
on of information did not occur in certain situations, which left us
frustrated and unable to get certain goals accomplished.

So we certainly need to address that problem and get some egos
out of the way and get some major agency heads to sit down and
actually, instead of making promises, to actually put some bite into
what they are referring to and get things done, because without
this cooperation on the Federal level and the State level and the
local level, this is a crime problem that as representatives of local
police departments, we cannot take on by ourselves.

Senator ROTH. I suppose it is even accentuated by the fact that
not only are they involved at the local level, but you have the inter-
national aspects of these criminal elements as well. But I think you
make a very valid point and one that gives me real concern.

Mr. Mackey. Chairman Roth, there were certainly a lot of prom-
ises made in this room today, and I certainly hope that a lot of
these representatives fi-om these different agencies come through
on these promises.

Senator Roth. Well, we will try to help to make sure they do in
fact follow through, because you are exactly right; it is going to
take cooperation at all levels of Government.

Mr. Mackey. Thank you, Mr. Chairman.

Senator Roth. Mr. Cefarello?

Mr. Cefarello. Yes, I agree that some of the investigations have
been stymied by Federal and city people not getting along or not
sharing information.

However, like I said in my statement, there are meetings held
regularly with ourselves and Customs, INS, the State organized
crime task force and all of these Federal agencies getting together
with us, and we are doing fairly well at sharing information.

I hope that in the case of the Resnikov killing and other killings
that Mr. Casso spoke about, maybe we will get a shot at talking
to him and finding out about some homicides he is speaking of;
maybe he can help us clear them up. Maybe a Federal agency can
help in that way.

Senator ROTH. Mr. Pollard?

Mr. Pollard. Mr. Chairman, at the present time, I enjoy a real
good rapport with State and Federal agencies in all aspects
through our meetings and our joint ventures as far as putting cases
together and even the task force. I think everybody is pretty well
aware of the problems and that we have to work together.

In the Los Angeles area, most agencies are working together to
try to get a handle on this.

Senator ROTH. Let me finally turn to our anonymous witness. Do
you have any comment?

Anonymous Witness. Yes, Chairman. I can only speak for the
area of the country in which I am currently working. Although we
have an informal cooperation between several Federal, State and
local law enforcement agencies, I would like to see full-time task
forces established in which all of the appropriate agencies will con-
tribute the necessary resources and effort to combat this growing
problem.

In my opinion, no one agency can accomplish this task alone.

Senator RoTH. You have a Russian background. Do you have any
suggestions as to how to improve cooperation and exchange with
the Russian authorities?

Anonymous Witness. Yes, Chairman. I would like to see a liai-
son established between the law enforcement agencies and the Rus-
sian communities in major metropolitan areas. I would like to see
encouragement from the law enforcement agencies with the Rus-
sian communities to join the law enforcement agencies.

Senator ROTH. Thank you.

Senator Nunn?

Senator NUNN. Thank you, Mr. Chairman.

I had it in my opening statement, as I believe you did in yours,
Mr. Chairman, but I would like to ask the police officers directly.
We talk about Russian organized crime, but it sounds to me as if
you are describing a much broader geographical description to in-
clude most of the former Soviet Union and even Eastern Europe.
Would it be fair to say that, or are you really talking about Russia
in a limited geographic sense?

Could I ask our anonymous witness first?

Anonymous Witness. Yes, Senator. When I am referring to Rus-
sian organized crime, I am referring to the former Soviet Union re-
publics.

Senator NuNN. The whole array, including Ukraine, Kazakhstan,
Central Asia

Anonymous Witness. All 15 repubhcs.

Senator NUNN. Are you also including Eastern Europe?

Anonymous Witness. Yes, Senator— Poland, former Czecho-
slovakia.

Senator NuNN. So as you use the word "Russian" here, it is a
very broad description of, really, the former Soviet empire, is that
right?

Anonymous Witness. You are right. Senator. The reason I am
referring to "Russian organized crime" is because they all speak
Russian, although they come from different republics.

Senator NuNN. So the common denominator is speaking the Rus-
sian language.

Anonymous Witness. Right.

Senator Nunn. Mr. Mackey?

Mr. Mackey. I concur. Senator Nunn, with my comrade — correc-
tion, my counterpart; I got cared away there — I concur with my
counterpart regarding his testimony. As previously indicated, the
phrase "Russian organized crime" is a misnomer, but for simplicity.

it makes things a lot easier. But as indicated, we are also encoun-
tering Azerbaijanis, Armenians, Georgians, Chechens — a whole
gamut of people from the former Soviet Union — in Brighton Beach.

Senator NUNN. Mr. Pollard, I cannot see you, but I think you can
hear me.

Mr. Pollard. Yes, sir.

Senator NuNN. Do you concur in that, or do you have a different
view?

Mr. Pollard. Yes, Senator, we concur as far as most of the Rus-
sian-speaking people. In the Los Angeles area, with the large popu-
lation of Armenians, we do separate them out, and although they
work together with the rest of the Russians, they have their own
community, and it is large enough that we have a team that works
on Armenians, and my partner and myself work on the rest of the
Russians.

Senator NuNN. I would like to have an opinion from each of you,
including our anonymous witness, as to how you compare the "Rus-
sian" or former Soviet Union organized crime problem in your com-
munities with other organized crime, including traditional orga-
nized crime, the LCN, the Medellin cartel, the Jamaican posse, the
various gangs that we have seen, the Crips, Bloods and so forth in
Los Angeles.

As a general question, how do you compare the degree of bad in-
fluence, destruction, crime and so forth carried out by the Russian
organized criminals compared to these other groups?

Mr. Mackey?

Mr. Mackey. Senator Nunn, that certainly is a big sphere to ad-
dress. We know that in New York City, as in other large cities
where we had traditional organized crime or La Cosa Nostra in
place, that the Federal Government and local governments have
certainly been very, very effective in taking down their empires,
certainly in the last couple of years.

We do have the cartels in place in New York City involved in
narcotics, which are being addressed by different units of the police
department, and the Jamaican posses as well.

I am speaking here solely about Russian organized crime. It cer-
tainly has the ability and the potential to become a serious threat
to New York City if not checked in the near future. It certainly has
the ability to move its tentacles out into the surrounding tri-State
area as well.

Senator NUNN. Would it compare with the LCN now that the
LCN has been knocked down in some particular families and so
forth, and with the successes we have had? Which would be more
serious now — the "Russian" organized crime problem in the New
York area or the LCN?

Mr. Mackey. I would have to agree with other members of my
profession that certainly LCN has the capability and has been in-
volved in more activity. But with the vacuum recently created by
the major take-downs of LCN families and people within their or-
ganization, Russian organized crime, again as a misnomer, is cer-
tainly standing by and ready to fill that vacuum if we are not there
to take on this situation.

Senator NUNN. So LCN would still be more potent now, but you
think the potential is there for Russian organized crime to step into
the vacuum that is being created?

Mr. Mackey. Yes. I certainly do not feel there is anyone in the
room who would state that the LCN or traditional organized crime
has been completely decimated by law enforcement. We know that
they still exist; however, we have been chipping away strongly over
the past couple of years and making great inroads. But again, as
I stated, the Russian organized crime — certainly, it is vying for
power and it is out there, and we have got to get it in check soon.

Senator NuNN. How about in Los Angeles, Mr. Pollard, the same
question — how does this compare relative to other organized crimi-
nal activities including LCN, but also including organizations like
the Crips and the Bloods that we have had hearings on before
here?

Mr. Pollard. Yes, Senator. First of all, addressing the Crips and
Bloods and some of the others, that is a major problem that we
probably have more violence from than most of the rest of the
groups put together in terms of drive-by shootings and that type
of activity.

That is being addressed by several different divisions and groups
within my department. In terms of other ethnic groups, there are
several around, none of which seem to have the potential at this
point that I can see that the Russians do — and I use that term
"Russian" including Armenians in this sense.

Senator NuNN. Right.

Mr. Pollard. The LCN in Los Angeles has never been as strong
as the East Coast LCN. In fact, they have terms for themselves
that include "Mickey Mouse Mafia" and things like that, that show
that

Senator NuNN. "Mickey Mouse" what?

Mr. Pollard. They refer to themselves even as the "Mickey
Mouse Mafia" on the West Coast, and they do not seem to have the
strength of any of the families from the East Coast. East Coast
families come out and set up businesses and do not even contact
them for approval or to pay tribute.

So the LCN is not that strong of an issue in the Los Angeles
area. I personally believe — and it is probably because I am working
the Russians — that the Russians have a little more power right
now and are going to be a lot more powerful as things progress.

Senator NuNN. Could I ask our undercover police officer the
same question? In general, comparing this group that we have
called for the purposes of this hearing "Russian organized crime"
to other organized criminal activities in the area of your expertise?

Anonymous Witness. Senator, I consider myself an export on
Russian organized crime. I am not familiar with the other — or, I
was not involved in the other criminal organization investigations.
So I would have to accept the opinion of my comrade from New
York as well as my colleagues from other cities.

Senator NuNN. You are accepting him as a comrade, right?

Anonymous Witness. Yes, Senator.

Senator NUNN. OK. I would like to ask our witnesses from New
York and L.A. this question. You have heard the undercover wit-
ness here basically say that he would have to advise someone who

was being extorted in this situation to cooperate rather than to go
to the police officials. Would that be, in your area, also your view,
or do you have a different position?

Mr. Cefarello. I believe that at this time, I would probably
have to tell somebody the same thing that he is saying. It is prob-
ably a lot safer right now to just pay the money.

However, as a law enforcement officer, I do not want to do some-
thing like that. What I would suggest is that we find a way to pro-
tect this person's family here and in the former Soviet Union.

Senator NUNN. You are saying you need a lot better protection
for people who come to the law enforcement officials with those
kinds of complaints than we have now.

Mr. Cefarello. Right. Right now, we have the witness protec-
tion program. That helps for the person who is talking here. What
about his wife or his child or his mother and father in Russia,
whom we cannot protect at this time and are vulnerable?

Senator NuNN. Do you concur in that, Mr. Mackey?

Mr. Mackey. I disagree, Senator Nunn, only because I would
probably get my head lopped off if I went back and stated anything
to the contrary. Any complainant who walks into a New York City
police precinct, we certainly have to entertain and accept every
complaint that is given to us, and we would certainly advise any
complainant coming in who was the victim of an attempted extor-
tion or an extortion that we are there, willing and able to provide
the assistance and conduct the investigation to possibly arrest and
then probably prosecute these people — although, as stated earlier,
it is very, very difficult to get past the arrest stage with these peo-
ple. A lot of them are very, very happy in the NYPD vernacular
to "take the collar," and then once the "collar" is over, never show
up for grand jury proceedings or any further prosecution.

Senator Nunn. Mr. Pollard, could I ask you to answer the same
question — extortion and your advice in L.A. to potential or actual
victims?

Mr. Pollard. Yes, Senator. In Los Angeles, I try to get every vic-
tim I can who is reporting an extortion to actively go along with
our investigation.

The biggest problem we have after that point is with the prosecu-
tors. We are having to educate individual prosecutors as we go with
particular cases, and this is a problem because in large cities, the
prosecutors have a filing policy that unless it meets a certain level,
they are not going to prosecute the case. A lot of our cases fall
below that level.

We need to prosecute every case we can, and that does two
things. It sends a message to the criminals that our system is not
going to allow their activities, but it also sends a message to the
Russian-speaking community that we are there, and we can help
them. And without getting into that community, we are never
going to have them come forward again.

Senator Nunn. Thank you, Mr. Pollard. You are the "anonymous
witness" as far as I am concerned, since I cannot see you, but we
appreciate you being here.

Mr. Cefarello, Mr. Mackey, and our undercover police officer, we
thank all of you for being here, and Senator Roth, to you and your
staff, thank you for having the focus on this. I think it is a very

important subject, and I congratulate you for the hearing and the
focus.

Senator RoTH. Thank you, Senator Nunn.

I want to thank each of you gentlemen for being here. I think
your testimony has been most helpful.

For the final time, I will ask that the Capitol Police secure the
hearing room, ensure that all spectators remain seated, and that
no one be allowed to enter or leave the hearing room during this
witness' exit.

Prior to the exit of this witness, I direct that all cameras be
turned to face either to the rear or to the window side of the hear-
ing room. I understand the cameras have all been turned, and I
would ask that the witness now leave the hearing room. Again, I
want to thank each of you. We do not want any of your heads
lopped off.

The Subcommittee is in recess.

[Whereupon, at 1:50 p.m., the Subcommittee was adjourned.]

APPENDIX

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- Viktor Averin

LUDWIG FAINBERG ORGANIZATION

- Ludwig Fainberg

MONYA ELSON ORGANIZATION

- Mooya Elson

MOGILEViCH ORGANIZATION
- Semion Mogielvich

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- Ruslan Labazanov

FANCHINI ORGANIZATION
- Riccardo Fanchini

LYUBERETSKAYA ORGANIZATION
- Vadim Voronin

KAZANSKAYA ORGANIZATION
- Unidentified

DAGESTANTSY ORGANIZATION
- Unidentified

BRANDWAIN ORGANIZATION „:^
- Rachmiel Brandwain M

MAZUTKINSKAYA ORGANIZATION
- Alexei Petrov

BORIS SORKIN ORGANIZATION j
*- - Boris Sorkin

BAKLANOV ORGANIZATION

- Boris Lungin

- Lev Andelman

RUDYAK ORGANIZATION
- Mikhail Rudyak

BRUK ORGANIZATION
- Mikhail Bruk

SOGOMONIAN ORGANIZATION
- Levon Sogomonian

IBRAGIMOV ORGANIZATION
. - Nikolay Ibragimov

ARAKELIAN ORGANIZATION
- Vrej Arakelian

ITAEV ORGANIZATION
- Meir Itaev

BLIKIAN ORGANIZATION
- Nishan Blikian

.ERGEY EFROS ORGANIZATION
- Sergey Efros

SOGOMONYAN ORGANIZATION
- George Sogomonyan

VILNIUS BRIGADE ^

- Georgi Dekadnize

VORKUTA ORGANIZATION
- Viktor Panchuk

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INTERNAL REVENUE SERVICE CRIMINAL INVESTIGATION

MOTOR Fuel Tax Fraud Indictments

DATE

LOCATION

PERSONS

Indicted

ESTIMATED

TAX LOSS

($ MILLIONS)

03/29/93

PHILADEPHIA

$14.8

04/06/93

COLORADO
NEBRASKA
WYOMING

4.6

05/05/93

NEWARK

60.0

05/27/93

BROOKLYN

34.

06/30/93

BROOKLYN

85.

09/02/93

HOUSTON

3.0

01/07/94

ATLANTA

1 .3

1 0/27/93

PITTSBURGH

21 .O

1 2/03/93

02/24/94

08/08/95

NEWARK

140.0

09/ 12/95

LOS ANGELES

N/A

TOTALS

136

$363. 70 i

CITY OF

Glendale

CALIFORNIA '"•'"•

POUCE
DEPARTMENT

140 North Isabel St., Glendale. CA 91206-4382 • (818)548-

May 10, 1996

United States Senate

Permanent Subcommittiee on Investigations
Senator William V. Roth, Jr., Chairman
Senator Sam Nunn, Minority Member

Attn: Michael Bopp

Subcommittee Counsel

Dear Senators:

The City of Glendale, California Police Department regrets that it
cannot make available a law enforcement representative to personally
testify before the subcommittee as we had originally planned. But we
do hope that our voice can still be heard by submitting this document
so that it may be introduced into the subcommittee record as to our
efforts in attempting to thwart the Armenian and Russian Armenian
organized crime problem.

Historically, Glendale has been a homogenous community made up
predominantly of Caucasian population. The city for years was
considered a middle to upper middle class conservative neighborhood.
However, approximately twenty-five years ago the demographics of the
city began to change and Glendale became a heterogeneous
community. The influx of the Armenian population to the Glendale
area, specifically Russian Armenian, is attributed to two waves of
migration. In the early I980's, we saw the first wave of migration of the
Russian Armenians to the Glendale and adjoining cities. Then, in
1991, after the fall of the "Iron Curtain", the City of Glendale
experienced a drastic population increase within the Russian
Armenian communities. Currently, the city's population is estimated
at 200,000, of which is roughly 25% Armenian. It is estimated that
approximately 50% of the city's Armenian population is Russian
Armenian.

To meet the demands of the cultural diversity of the city, the police
department began an aggressive recruiting effort to balance its work
force to meet the demands of the community. At present, the Glendale

Police Department employs 223 sworn personnel, and upwards of 10

Ti-c.

civilian employees. Of these employees, we have (4) full time Armenian police
officers and (6) civilian Armenian employees. This translates into roughly 3.5% of
the work force having an Armenian background. In addition, the Glendale Police
Department has (4) reserve police officers of Armenian descent, and upon successful
completion of the police academy, we will soon be adding a Russian speaking officer
to full time status.

In 1994, the management of the Glendale Police Department realized there
was significant Russian Armenian organized crime developing within the city as
well as throughout the region of Los Angeles County. As a result, the Glendale
Police Department expanded its criminal intelligence unit to also include an
organized crime unit. With limited manpower and resources, the department
allocated a sergeant and three officers to address the organized crime issues of the
Russian Armenian communities not only in Glendale, but throughout the region.

At present, our criminal intelligence and organized crime unit investigates
and gathers information on crimes against persons, crimes against property, fraud
related crime and narcotic offenses. Of these, our unit along with the assistance of
other units of the department, investigate murders, extortions, robberies, felonious
assaults, arsons. Financial crimes including, money laundering, check kiting,
counterfeit check production, auto insurance/medical insurance fraud, electronic
fraud (credit card fraud and cellular phone fraud). Additionally Glendale has always
been aggressively involved with enforcing narcotic smuggling and distribution.

The following is a synopsis of three investigations which directly involve Russian
Armenian organized crime elements in the Glendale and surrounding areas.

1) Murders with in the garment district:

-A multi-agency cooperative effort has been established to investigate the
recent rash of violent murders and attempted murders associated with the garment
district, which are primarily Russian-Armenian owned businesses. Intelligence
gathering revealed a major clothing line had sub-contracted out to several sweat-
shops to reduce production costs in the Los Angeles and Glendale areas. As a result,
stiff competition came about as sub-contractors attempted to underbid in order to
obtain the production contract. In some instances, there were bribes and "kick
backs" to company management in order to leave a contract with a certain sub-
contractor. Sub-contractors became disgruntled and the garment district wars began.
To date, there have been five murders, five attempted murders, shootings,
bombings and extortions committed within the garment district. All of these
incidents are believed to be organized crime related since due to clear indications
that sub-contractors were tied very closely to organized crime figures and known
hit-men. As a result of these crimes, there has been one conviction for murder.

2) Extortions:

- This agency conducted an extortion investigation where an individual, Hagop
Kerboyan was extorting money from a Glendale chiropractic doctor. Threats were
made to force the doctor to pay a substantial amount of money in lieu of physical

25-049 0-96-4

injury. It was later determined the doctor was committing insurance fraud on the
State of California for large sums of money. Kerboyan, having knowledge of this
extorted the doctor, believing because he was conducting a fraudulent business,
would not report the extortion. Ultimately Kerboyan was convicted and the doctor
was indicted. Our investigation has also revealed that Kerboyan belongs to a
organized crime cell in the Glendale area.

Investigating these types of cases indicates that although up until now, the
Russian Armenian criminals were not structured as traditional Italian organized
crime, but they are becoming increasingly structured and disciplined. It is evident
that there are cells of loosely structured groups which contain anjrwhere from ten to
one hundred individuals. These groups have agreed to divide the Los Angeles
region into territories which are controlled by their respective criminal groups.
These groups extort "territory taxes" from the businesses within their specific area.
If businesses refuse to pay, they usually are threatened often resulting in murder.
Their family members are also threatened in order to send a message. In some cases,
family members are threatened who live in their former homeland (usually
Armenia) if they do not cooperate. Due to the threatened violence, the victims are
forced to pay the extortionists, and thus the crimes go unreported. These criminal
groups have become increasingly educated in their criminal activities in that they
are now targeting victims that are medical professionals and lawyers who
themselves are engaged in medical insurance fraud or auto insurance fraud, (staged
auto collisions). The extortion groups know that this group of individuals are less
likely to report the extortions to law enforcement due to their own involvement in
criminal activity and the large financial return. Often times the results of these
extortions are shootings, stabbings, and murder.

3) White collar crime and electronic fraud:

-These crimes include check counterfeiting and kiting, money laundering,
cellular phone fraud, and credit card fraud. Of particular interest is a case in which a
Russian Armenian had been cloning cellular phones for over three years. He had
been arrested for a previous cellular phone fraud offense and was on probation
when our investigation began. Through our investigations, we learned that the
subject of our investigation was cloning the cellular phones of the "Joe Mikaelyan"
crime group. This crime group was recently dismantled by a joint task force which
was made up of the Federal Bureau of Investigation, the Internal Revenue Service,
Long Beach Police Department, Los Angeles Police Department and the California
Department of Justice. Joe Mikaelyan, a self-professed Armenian Mafia Godfather,
and his crime group were responsible for financial losses that reached multi-million
dollar figures as it related to tax evasion, cellular phone cloning and fraud related
crimes. Our investigation revealed that Joe Mikaelyan routinely telephoned and
received calls from top-level Russian crime figures located on the east coast. The
suspect in our cellular phone cloning operation had been under investigation by the
cellular phone industry for several years. The cellular phone industry estimates
that in North America, more than $600,000,000 annually are lost in revenue due to
cellular phone cloning and related expenses for investigations into their losses. The
leading states for cellular phone fraud are New York, Florida, and California. The

cellular phone industry believes the Russian Armenians to not only be the
"Gcdfathers" of cellular phone fraud, but also the leaders in cellular phone cloning,
and responsible for the vast majority of their losses. The cellular phone industries
representatives further explained that no other criminal group has dominated the
illegal cellular phone cloning operations the way the Russian Armenian
community has. While investigating a cellular phone cloning suspect, we learned
that in a one month period he was responsible for a loss in excess of $140,000 to the
cellular phone companies. This translates into an annual loss of over 1.6 million
dollars.

Recently, the Glendale Police organized crime unit investigated two Russian
Armenian brothers who had developed a process to defraud not only the cellular
phone companies, but also long distance telephone carriers such as ATT and MCI.
The two suspects had printed business cards advertising 24 hour service for long
distance calling to countries around the world. The business cards were printed in
Russian and Armenian languages, thereby operating under a comfort zone and
screening customers. The two suspects had set up a bank of three pairs of cloned
cellular phones, having phones linked to each other. In order to speak to friends
and relatives overseas, particularly in Russia and Armenia, the customer phoned
the beeper number on the business card. Once the call was completed, the suspect
would send a "runner" to the customer's residence to collect the money for the
phone call. Although these crimes may seem to be less significant in the realm of
more serious and violent crimes, they are an indication as to how complex some
investigations can be when dealing with fraudulent crime.

Compared to traditional organized crime, we have learned that the criminals
we investigate tend to be more opportunistic then organized. An accurate
description of these groups is loosely structured organized cells of criminal groups.
However, this does not diminish the organized and violent manner in which they
commit their crimes. It is our opinion, that we are witnessing the precursors to the
traditional organized crime "family" structures with bosses, captains, lieutenants,
and field soldiers. If this does occur, prosecution of top level figures would be
difficult.

The following factors make it difficult for law enforcement to attack the
Russia /Russian Armenian organized crime problems within the Los Angeles and
Glendale regions:

-the lack of Russian or Armenian speaking investigators;

-the language barriers under which these criminals operate, which

has become their comfort zone;

-the ability for Russian criminals to operate so well in a black

market setting, due their past ability to survive in a communist economy in

their homelands;

-their lack of fear or respect for the American Judicial System

because of their knowledge of the leniency of the courts due to

overcrowding of jails and prisons;

-their propensity towards violence due to their background and upbringing;

-the ability for Russian or Armenian foreigners to enter tlie country

illegally or with "tourist" visas to commit a specific crime, which often times

means an extortion or gangland murder. Soon after they commit their

crimes, they flee the country only to return some years later with different

identities;

-the sophisticated manner in which criminal activity is carried out

within the Russian and Russian Armenian criminal groups. This again can

be directly attributable to the fact that they come from a system where criminal

activity is common place;

-the educational and training background of these organized crime

members, some of whom have been former KGB agents, former police

officers, politicians, medical professionals and such back in their countries.

As an example, several years ago our department arrested the former police

chief of the city of Yerevan, Armenia's capital, for an investigation into

extortion, rape, and kidnapping;

-and finally, the loose structuring of these criminal groups makes it

difficult for law enforcement to track criminal activity and identify

co-conspirators.

In conclusion, it is our opinion that crime associated with the Russian and
Russian Armenian communities will become more violent, sophisticated, and
clandestine. Law enforcement today is ill equipped to effectively investigate the
issues of Russian organized crime. Although addressing the issues is a positive step,
law enforcement is in need of the tools to apply intelligence information to actual
investigations and subsequent arrests. This includes additional manpower,
equipment, and a multi-agency joint task force comprised of federal, state, and local
resources. Task forces are effective means to target Russian organized crime before
establishing an irreversible foothold in the United States, as- traditional organized
crime. For smaller agencies, it is difficult to allocate significant amounts of
resources to combat Russian organized crime. However, if the resources of smaller
agencies are combined with resources of larger agencies, the results will be far more
effective.

Mark W. Distaso

Commander

Special Investigations Bureau

Serjeant ^rfatt Wojnarowski
Supervisor
Intelligence/Organized Crime Unit

Agent Gerald Uebel
Lead Invesitgator
Intelligence/Organized Crime Unit

DEPARTMENT OF THE TREASURY

U.S. CUSTOMS SERVICE

«"*;,/:

liHiPin

August 19, 1996

Mr. Stephen Levin

Senior Counsel

Senate Coiiunittee on Governmental Affairs

Permanent Subcommittee on Investigations
SR-100 Russell Senate Office Building
Washington, DC 20510

Dear Mr. Levin:

Attached please find the information Chairman Roth and Senator
Cohen requested at the hearing held on May 15, 1996, concerning the
U.S. Customs Service investigations into Russian Organized Crime.
If you have questions or need additional information, please do not
hesitate to contact me.

Gloria Bryane

Director

Office of Congressional Affairs

Attachment

Chairman Roth: "First Commissioner Weise, in your testimony, you
mentioned that the Department of Defense was defrauded by
material that was built on stolen intellectual property and was
inadequate. Could you tell me how wide or how broad is this kind
of incidence? Do we have any feeling for how widespread a
practice this is?"

Answer for the record:

The Electrodyne investigation is the only type of investigation,
known to the Customs Service where the U.S. government contracted
out to individuals who then subcontracted out to Russian and
Ukrainian military contractors to produce specific electronic
items for inclusion in our national defenses. Then these
subjects manufactured the products to substandard specifications
overseas and marked them as made in America prior to presenting
the items to the Department of Defense.

Senator Cohen: " on the first chart you showed, you indicated

that there were 6,000 grams of heroin being smuggled in, and you
said that 14 people have been convicted. My question is what are
the sentences given out to those 14 individuals who were
convicted?"

Answer for the record:

attached

The New York heroin case sentencing:

1. 18 months prison then deportation

1. 30 months prison (humanitarian reasons - subject has
terminal illness)

1. 121 months prison

60 months supervised release

1. 121 months prison

60 months supervised release
$5,000 fine

1. 94 months.- prison

60 months supervised release

1. 12 months prison

60 months supervised release
$5,000 fine

1. 60 months supervised release

1. 12 months prison

60 months supervised release
400 hours community service

1. 60 months supervised release
$5,000 fine

1. 10 months prison then deportation

1. deportation to Israel

1. 63 months prison

36 months supervised release

1. 63 months prison

36 months supervised release

other defendant not sentenced yet.

100

statement of George J. Weise, Commissioner,

D.S. Customs Service

before the Senate Committee on Governmental Affairs

Permanent Subcommittee on Investigations

May 15, 1996

Good morning, Mr. Chairman and Members of the Committee. It
is a distinct pleasure to appear before you today to discuss
Russian/Eurasian organized crime in the United States and the
cooperative efforts between the U.S. Customs Service and the
Forner Soviet Union (FSU) to combat this growing problem. I
would like to describe Customs' unique role and mission in this
area .

One of the most critical challenges customs administrations
worldwide, face now, and in the future, is the threat posed by
Russian organized crime. The fall of the Berlin Wall in 1989 and
the collapse of the Soviet Union resulted in the emergence of a
new threat to the national security of the United States and the
world community. As a consequence of the collapse of the Soviet
State, a vast supermarket of nuclear materials, other stockpiled
weapons of mass destruction (WMD) , and avenues for international
money laundering through various criminal schemes, including drug
smuggling, have become available. In response to this ominous
threat, and as the geopolitical climate changes, U.S. Customs is
refining and intensifying its existing strategies and developing
new initiatives to deal with this problem.

Enhanced law enforcement efforts must be taken now to guard
against nuclear weapons or weapons-grade material falling into
the hands of outlaw nations, organized crime groups, or terrorist
bands planning to carry out a catastrophic attack. Further, the
United States, through the combined efforts of the law
enforcement community, must enhance its efforts to deter
Russian/Eurasian organized crime before it becomes well-
entrenched in the United States.

Finally, we must use our collective law enforcement skills
to ensure that organized crime groups do not thwart the ongoing
democratic process in Russia. We cannot sit idly by while
organized crime groups expand their operations. Indeed, as I
stated at the outset, a breakdown in Russia's civil order will
present grave national security concerns for America.

To ensure that we are devoting sufficient resources to
address the expansion of operations of international organized
crime groups into the United States, we must increase both our
foreign liaison efforts and maintain our investigative emphasis
on international criminal organizations. Second, we must
continue to provide training programs which are responsive to the
legitimate needs of foreign law enforcement agencies, thereby

101

enhancing their capabilities to meet the threats of

Russian/Eurasian organized crime and the sale and diversion of
nuclear materials. Several nations have already asked for our
assistance. It is in the best interests of the world community
that we continue these initiatives to prevent these organized

crime groups from becoming more powerful and entrenched.

From a U.S. Customs investigative perspective, the main
threats posed by Former Soviet Union (FSU) criminal groups, both
domestic and foreign, continue to be, narcotics smuggling, money
laundering, commercial trade fraud and the smuggling/sale of
illicit munitions and strategic materials. Another threat that
has emerged in the last few years is the increase in the number
of cases involving the smuggling of stolen vehicles from the
United States to the FSU.

The typical Customs investigation does not necessarily
target the totality of any one particular organized crime group.
Rather, Customs' unique nature, as a primary border enforcement
agency, and the multifaceted and diverse set of laws that Customs
enforces, usually results in investigative and enforcement
activity directed at specific criminal activities of organized
crime groups. Often the net result of these investigations is
the disruption and debilitation of major organized crime groups
with subsequent prosecution.

Since 1991, Customs' investigations, relating to Russian
organized crime, both open and closed, total approximately 82
cases. Customs investigations at this time have focused on
approximately 5-6 primary organizations. These cases range in
content from drug smuggling cases to money laundering to export
violations and commercial fraud activity. In addition. Customs,
working with other law enforcement agencies, maintains an active
Russian organized crime intelligence program which has documented
over 2000 individuals and companies associated with criminal
activity.

The growth of Russian/Eurasian organized crime groups in the
United States continues to be a principal concern for law
enforcement. Although the Russian Federation has received the
majority of attention and press regarding the increase of
organized crime activities, the other 14 new republics that were
once part of the Soviet Union, and the Warsaw Bloc countries that
were controlled by the Soviet Union, are all experiencing a
significant rise in organized crime activities. Though now
separated by country borders, many of these organized crime
groups in the new republics are known to be associated with each
other and have worked together in the past. Russia, the largest
country in geographic area and population, is the cornerstone of
stability in the area. The criminal groups comprised of emigres
from the FSU function as an integral part of an international

102

network with known ties to the Colombian Cartels, Italian Mafia,
Israeli organized crime, and other international organized crime
groups .

Criminal cells/networks comprised of emigres from the FSU
operating in the United States have been identified by many
different terms, "Russian Mafia," "Russian Organized Crime,"
"Organizatsiya , " "Malina," "Mafiya," "Odessa Mafia," and "Soviet
Criminal Network." According to various sources, some of the
cells/networks are aligned with specific leaders, and others by
ethnic background, or a particular criminal activity.

The true organizational structure and number of
Russian/Eurasian organized crim.e groups operating in the United
States is unknown at this time. Many in law enforcement believe
that the groups are organized along ethnic, ' religious or
geographical alliances. However, this theory is not etched in
stone, as some groups may be organized strictly for profit.

Based upon available intelligence sources and de-briefings
of knowledgeable confidential sources, it would appear that
Russian organized criminal groups operating in the United States
is not structured in the same manner as traditional organized
crime syndicates, i.e. there is no criminal hierarchy or firm
chain of command. The complexion of this criminal activity will
change in the foreseeable future with the influx into the United
States of known crime figures who are members of established
crime families throughout the FSU.

Russian organized crime groups are also using the services
of commercial information companies in an attempt to gather
information on government and law enforcement officials involved
in the investigation of Russian organized crime. Clearly, this
poses a potential threat to law enforcement officers, since
information may include details such as address and telephone
numbers, identities of family members, credit card information,
vehicle ownership, etc.

The U.S. Customs Service, as a protector of our borders, is
the first line of defense in United States law enforcement. Our
mission will be seriously challenged by the narcotics smuggling,
money laundering, and commercial fraud threats, as well as the
smuggling/sale of munitions and strategic materials. Throughout
the United States, informal task forces have been established by
Customs, to investigate specific FSU emigre criminal cases. The
preferable way to deal with this issue, in the areas of concern
to the United States, would be through the coordinated exchange
of information, better intelligence collection and by
strengthening cooperation between law enforcement agencies. Law
enforcement should target individuals and companies, and
investigate crimes committed by FSU emigre criminal groups,
utilizing laws that have been used successfully against other

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groups such as the traditional Mafia, Cartels and other high
profile criminal organizations.

FSD LAW EN70RCEMEKT
COOPERATION/ ASSISTANCE

Customs Mutual Assistance Agreements

The United States currently has Customs Mutual Assistance
Agreements (CMAA's) with 26 nations. These are Executive
Agreements negotiated with other nations considered to be
critical for customs law enforcement cooperation. These
agreements deal with the exchange of information and the
enforcement of prohibitions, restrictions, or controls. CMAA's
provide a basis for sharing information and coordinating
operations in all areas of enforcement.

In the former Soviet Union, we currently have agreements
with Russia (1993), Belarus (1994), and U)craine (1994). We are
currently in the process of negotiating agreements with Kaza)cstan
and Kyrgyzstan. We also have agreements with almost all of the
European Union states, as well as, Poland, Hungary, the Czech
Republic, Finland and Sweden.

Customs Attache in Moscow

In an effort to capitalize on the growing working
relationship between the U.S. and the Russian Federation, Customs
has received approval to permanently place one agent in Moscow to
work closely with Russian Customs and law enforcement officials.
The position has been filled with a qualified Russian speaking
agent. Prior to this position being filled, a Customs agent was
temporarily assigned to Moscow for the past several months, while
our Customs Attache in Bonn continued to assist with
investigations in Russia, Ukraine and some of the other Newly
Independent States (NIS) . The results thus far are impressive.
The cooperation we have received from Russian Customs and the
Russian Federal Police has been outstanding.

U.S. Customs has had contact with its direct counterparts in
the former Soviet Union and the Russian Federation for over
20 years. Even under the Soviet system, relations were
cordial and a Customs Mutual Assistance Agreement (CMAA) was
concluded. Since 1992, relations with the State Customs
Committee of the Russian Federation have been greatly expanded
and intensified. A new CMAA was concluded in 1994 and signed
during a summit meeting between Presidents Clinton and Yeltsin in
September of that year. The Director General of Russian Customs,
his senior staff and the 12 directors of their regional customs
administrations have all visited the United States and several
reciprocal visits have occurred or are being planned. Russian
Customs sent representatives to our seminar on Nuclear Smuggling

104

in September 1995, and they also sent representatives to a U.S.-
Russian Preventive Enforcement Technical Workshop in March of
this year.

At the working level, Russian Customs routinely shares
information and requests investigative assistance through our
Customs Attache office in Bonn, Germany. The assistance of
Russian Customs in Moscow has enabled us to expand our level and
breadth of contacts in Moscow to the Procurator General, other
law enforcement agencies and the Interior Ministry in Russia
(MVD) . In general, U.S. Customs jurisdiction is similar to that
of our Russian colleagues, but our investigative authority is
much greater. Russian Customs efforts at establishing an
investigative or "enforcement" component are underway, but at a
nascent stage of development. The most recent visit of Russian
officers to the U.S. involved three senior officials responsible
for providing security at border posts, investigating smuggling
between the ports of entry and responding to threats against
customs employees and facilities.

The Russian Customs Service has experienced phenomenal,
recent growth. While it was a force of only 6,000 officers in
1991, it may comprise as many as 40,000 by the end of 1996.
Our working relationship is expected to grow significantly with
the opening of an office in Moscow later this year, and, we
believe, that Russian Customs involvement in our non-
proliferation interdictions and investigations will be productive
in the near future. Both sides view such work as a significant
national priority. _

Training Initiatives

Our international training efforts stem largely from our
role as the lead U.S. law enforcement agency for investigations
and border interdiction in the area of drug smuggling,
international money laundering, trade violations, and export
controls. U.S. Customs coordinates its training in the FSU and
Eastern Europe through the Department of State Interagency
Working Group (IWG) . U.S. Customs has been conducting training
and technical assistance in these areas since the early 1980's.
For instance in the area of export controls we have provided this
type of training to at least 35 countries on four continents and
to more than 1,000 customs and police officers. Most of our
training efforts relate to drug smuggling, international money
laundering, trade violations, strategic violations, and
international stolen vehicles.

Our most recent training was the U.S. /Russia Preventive
Enforcement Technical Workshop. This program built a basis for
future export enforcement cooperation by familiarizing Russian
export enforcement managers with the United States Government's
preventive enforcement programs, measures, &nd methods. It

105

focused on the challenges and needs of effective export
enforcement, in regards to organized criminal enterprises. We
discussed techniques and regulations and laws used by U.S.
government agencies to meet export enforcement needs and the role
of interagency and international cooperation in detecting and
interdicting illegal exports. The training included discussions
in Washington, D.C. and visits to export enforcement field
operation sites in Ft. Lauderdale and Miami, Florida. The
Russian attendees spent two days observing actual enforcement
operations at the different field offices of the Department of
Commerce's Bureau of Export Enforcement, the U.S. Customs Service
and the U.S. Attorney. The training featured presentations and
discussions by the U.S. Customs Service, Commerce's Export
Enforcement, Export Administration, Treasury Office of General
Counsel, the Federal Bureau of Investigation, and the Departments
of State, Treasury, Energy and Defense on each of their
contributions to export control. The participants then discussed
the next steps needed to develop cooperative preventive
enforcement to combat organized crime.

Historically, Russian, and the former Soviet Customs, relied
heavily on academic training for all new employees. New trainees
were expected to attend their Customs Academy for two to four
years before actually beginning their jobs, taking such courses
as customs laws and regulations, and financial management.
Today, with the massive hiring program undertaken by Russian
Customs, this type of long term training does not meet their
needs. For this reason, we have been trying to assist them in
developing shorter more flexible training programs that can be
given at field locations and stressing the use of practical
exercises. Last September, U.S. Customs conducted a Train-the-
Trainer program in St. Petersburg, Russia. The overall objective
of this program was to further develop Russian Customs training
infrastructure by increasing the number of qualified training
instructors. This specific course focused on training related to
border interdiction. As I speak, another Cpstoms training team
is preparing to travel to Moscow this weekend to conduct a
similar Train-the-Trainer course. A third Train-the-Trainer
course has been planned to be delivered in Vladivostok later this
year.

AREAS 0? INVESTIGATIVE CONCERN
NARCOTICS SMUGGLING, PRODUCTION and TRANSSHIPMENT

The Russian Federation and many of the other new republics
have experienced a dramatic increase in drug use and related
crimes. There also has been an enormous increase in the amount of
poppies cultivated in a number of the new republics, which have
also become transshipment routes for narcotics destined for
Western Europe and the United States. Intelligence indicates
that FSU organized crime groups are significantly involved in
narcotics trafficking. Although arrest statistics and seizures

106

are low pertaining to FSU emigres' narcotics smuggling
activities, past experience has proven that this group has the
capability to adapt to any illegal act that generates a profit.

Further, based upon overseas seizures, intelligence,
source information and newspaper articles, the FSU (15 new
republics) and East Bloc countries have become a major sales
market, transshipment route, storage area and production source
for many drugs destined for Western Europe and the United States.
Heroin from the Golden Crescent and Golden Triangle, is
transshipped through the FSU to the United States. In August of
1995, two Polish nationals attempting to smuggle 100 kilograms of
heroin into Germany were arrested by German Customs. This is the
largest heroin seizure ever made, in what was formerly East
Germany .

Another area of major concern is the vast commercial/
military shipping fleet of the FSU. Italian authorities recently
seized approximately 600 kilos of cocaine hidden inside pallets
onboard a Russian commercial freighter. It' is believed that this
is just one of the freighters under the control of the Russian
drug mafia. There are also reports that sailors from the Far
Eastern Pacific Fleet are returning from Vietnam with hundreds of
kilograms of opium and cannabis.

One should not be deceived by the scarcity of arrests and
seizures of narcotics in the United States related to FSU
criminal groups. Intelligence indicates that developed FSU
criminal groups have vaulted right into the lucrative narcotic
business. FSU criminal groups are using corrupt FSU officials,
porous borders, import/export companies, transportation
companies, etc., to help distribute cocaine across Europe where
the profit margin is much greater.

Customs investigations have demonstrated that FSU criminal
networks have the capability and organizational skills to mount
successful drug courier operations. Evidence that FSU criminal
groups in the United States were developing more extensive ties
to international drug smuggling began to emerge in early 1991.
Since that time Customs has disrupted two separate heroin
trafficking rings involving FSU networks.

The first case developed in part from intelligence passed to
DEA from confidential sources indicating that U.S. citizens of
Russian and/or Polish background were smuggling heroin into the
United States. The subjects were allegedly arriving at JFK
airport aboard commercial flights originating in Poland or
Russia. The heroin itself originated in Thailand and was being
transported to Eastern Europe for shipment onward to the United
States. Concurrent with this intelligence, DEA purchased roughly
half a pound of heroin from two members of the FSU smuggling

107

organization.

This joint investigation between Customs and DEA eventually
led to the arrests of 18 people. An important aspect of this
case was not only that it demonstrated the capabilities of FSU
groups to engage in heroin smuggling, but also demonstrated their
connections to traditional organized criminal groups who were to
ultimately receive the heroin and distribute it for the FSU
group.

More recently, Customs tracked and disrupted an FSU
organization that was shipping heroin to the U.S. using both mail
and couriers. The investigation itself began when two couriers
of Russian extraction were arrested at JFK for smuggling a total
of about seven pounds of heroin. Both couriers, arriving from
Poland, had strapped the heroin to their bodies. Each individual
indicated that he had successfully smuggled a similar quantity at
least once in the past. Operating very similarly to the case
listed above, this organization is alleged to have shipped as
much as 2 kilograms of heroin a month to the U.S.

The organization used a small but effective group of
couriers who retrieved the heroin in three different locations:
Poland, Belgium, and Israel. In each case, the heroin was
shipped to these locations from Southeast Asia where the FSU
organization had supply connections. The heroin was generally
shipped to the transit points packed inside television tubes and
stuffed animals. The couriers, who body packed the heroin, would
return to the U.S. through three points: New York, Boston, and
Chicago. Once in the U.S., the heroin was distributed to various
individuals responsible for selling the drug, including Hispanic
and traditional organized crime elements. During the course of
the investigation, at least four of the organization's couriers
were apprehended as well as a large portion of the group's
members. (See Chart)

Two variations of the group's modus operandi included
sending couriers to Israel, where the heroin was passed to them.
The couriers then returned to Canada instead of the United
States. Once in Canada, the heroin was placed on another courier
who was concealed inside a car which was driven across the border
into the United States. The other variation used direct mail
shipments to the U.S. from Brussels.

In addition to heroin, citizens from the FSU have been
detected with cocaine, steroids and other illegally obtained
prescription drugs. More recently, opium shipped in the mail
from the FSU has been detected at our borders.

Heroin, hashish and cannabis are being, transported overland
across the Baltic route to Europe. A significant portion of this
contraband is then transported to the United States by couriers

108

or commercidl cargo.

with the arrival of a capitalist economic system in the FSU
a large number of chemists are now unemployed for the first time
in their lives. A number have turned to the production of
synthetic narcotics to generate an income. Russian law
enforcement authorities fear that Russia has the potential of
becoming a major center for the manufacture of synthetic
narcotics .

The Customs Service established that some Russian/Eurasian
organized crime groups are becoming involved in trafficking of
controlled substances in the United States. Furthermore, based
on the drug trafficking activities of Russian/Eurasian organized
crime groups in Eastern and Central Europe, available indicators
suggest that the involvement of Russian/Eurasian organized crime
figures in drug-related crimes in the United States will
increase. With the growing frequency of travel between Russia,
the rest of Europe, and the United States, the United States has
become increasingly available to Russian/Eurasian organized crime
groups as a site for criminal activities, including drug
trafficking .

For example, as illustrated in the attached chart, the
framework for the establishment of Russian/Eurasian drug
trafficking networks into the United States is already in place.
Using existing Russian/Eurasian organized crime contacts and
activities in the United States, drug trafficking by those groups
could rapidly increase in the near future. Some Russian/Eurasian
criminals currently in the United States, or with influence and
contacts in this country, are adept in the international
smuggling of a variety of contraband. That expertise obviously
can be used to facilitate the large-scale involvement of
Russian/Eurasian organized crime groups in American drug
trafficking.

FSU criminal groups continue to use the establishment of
front companies in the United States and throughout the world to
cleanse illicit/stolen money from the FSU. The companies are
also used for other related organized criminal activities. They
are used to obtain visas fraudulently for many FSU criminal
figures seeking to enter the United States. Once in the United
States these individuals then concentrate on expanding their
money laundering and other criminal activities.

VISA FRAUD and MONEY LAONDERING

The involvement of front companies to file suspect
employment based non-immigrant and immigrant visa petitions for
known and suspected FSU criminal figures continues to increase.
According to the U.S. Department of State, in Russia, visas
appear to be a potentially major loophole through which companies

109

can be established in the United States for the purpose of money
laundering and other organized crime related activities. The
U.S. Department of State's Bureau of Diplomatic Security, which
has statutory authority in visa fraud cases, and INS have a
substantial number of investigations targeting such companies.

Although this is not a new phenomenon, the increase in the
number of companies and individuals involved is staggering.
Historically, FSU criminal groups/figures have been known to be
excellent white collar criminals who set up numerous companies to
help masquerade their frauds. An example of this was a company
called M&S INTERNATIONAL which was based in Antwerp, Belgium.
M&S was owned by Rachmiel BRANDWAIN, who was a close associate of
Boris NAYFELD, a well known FSU criminal who operated out of
Brighton Beach in Brooklyn, NY. According to the attached copy
of the October 2, 1995, Newsweek article, in the late 1980's
BRANDWAIN was the middleman who helped corrupt Soviet Army
officials stationed in East Germany siphon more than a billion
dollars in illegal deals. He used his companies and connections
to assist the officers in hiding the illegal millions in offshore
companies and bank accounts. BRANDWAIN acknowledges his role in
this scheme. Subsequently, Boris NAYFELD and a number of people
associated with BRANDWAIN and his companies were arrested for
smuggling heroin into the United States.

This panoply of criminal activities will complicate Custom.s
efforts in detecting illicit funds laundering/drug smuggling
networks while easing the fraudulent entry of suspected FSU
organized crime members into the United States.

Currently, the Customs Service is investigating money
laundering activities centered around front companies that have
been set up in the United States to cleanse illicit/stolen money
from the FSU. The FSU authorities have provided the initial
information to start the investigations.

Trafficking In Radioactive Materials

The theft and sale of nuclear materials from the FSU is of
great concern to the entire world. The world's stability depends
upon the control of nuclear weapons and technology. If terrorist
groups or nations like North Korea and Iraq' are able to purchase
nuclear materials or technology from disenchanted scientists and
technicians from the FSU, and use them to fabricate nuclear
weapons, the nature of the threat facing the United States and
our allies would increase significantly. FSU criminal groups
have little regard for world stability.

According to the attached copy of the October 23, 1995, U.S.
News & World Report article, an illicit deal to sell beryllium
was orchestrated by a trading firm with ties to Russian organized
crime in the Sverdlovsk region of Russia in early 1992. The

beryllium was shipped from a restricted nuclear research facility
near the city of Obninsk to Moscow, then on to Yekaterinburg, in
the Sverdlovsk region. It was then transported to Vilnius,
Lithuania. The probability that this type of movement could take
place without the participation of corrupt officials is unlikely.

Prior to the seizure, an Austrian firm was prepared to pay
$2.7 million for the beryllium. It was reported that the firm
had lined up a buyer in Zurich, who was willing to pay $24
million for the shipment. This buyer was said to represent a
Korean interest. The beryllium had caused a brief gang war in
Vilnius, where a local crime group tried to extort money from
this smuggling operation, and resulted in ten men being killed.

The theft and sale of nuclear materials from the FSU
continues to be of great concern to the entire world. It has
already been documented on several occasions that criminal groups
from the FSU have taken advantage of this situation and attempted
to smuggle and sell these materials to the highest bidder. The
mind set of FSU criminals is to acquire money, which in the FSU
is power, and they will go to any extreme to achieve their goal.

A growing problem related to the dramatic growth of criminal
activity emanating from Eurasia and Eastern Europe is that of
increased criminal trafficking of low-enriched nuclear materials
and related radioactive materials. Information received by
Customs from a variety of sources indicates that the theft and
smuggling of these materials from the former Soviet Union and
Eastern Europe are appearing with increasing frequency in Germany
and elsewhere.

Europe first began to experience multiple incidents
involving illicit low-grade nuclear materials in 1991. These
incidents suggested that strategic materials from sources in the
former Soviet Union and from the former Eastern Bloc countries
were being illegally obtained, smuggled and illicitly offered for
sale in Western Europe. An example of this is our undercover
investigation into the illegal sale of nuclear-grade zirconium to
Iraq. This case is currently at the prosecution stage.

There also are serious concerns over the potential for the
illicit acquisition and trafficking of a wider range of nuclear
and/or radioactive materials which are more commonly available,
as well as commercially useable and saleable substances, such as
cesium, osmium, radium and others. Included in this category are
Plutonium and uranium, in quantities and at isotopic purity
levels well below weapons-grade. Materials in this category can
be more easily obtained by theft from nuclear, industrial and
research facilities, than can weapons-grade material. An example
of this is our investigation of stolen and smuggled non-
radioactive isotopes by our Detroit office.

Ill

In evaluating the current threat posed by this illicit
trafficking in nuclear and nuclear-related materials, it is
necessary to distinguish between what has been offered for sale
on the black market, and what is actually available for purchase
as determined through law enforcement investigations. During
1992 and 1993, suspected bogus representations surrounding these
offers to sell were numerous, and in 1992 and 1993, there were
confirmed illicit transactions in Europe which involved highly
enriched uranium and plutonium.

CONCLUSION

We live today in a global community. Technology,
communications, and the availability of rapid travel enable
organized criminals to conduct international criminal schemes on
a global scale. The U.S. Customs Service has undertaken a number
of initiatives with the dual objectives of both seizing the
contraband and identifying/arresting the perpetrators. Through
the continuing collective efforts of the Departments of Treasury,
State, Justice, Defense, Energy, Commerce, the Intelligence
Community, and our foreign counterparts, Customs will continue to
promote global security through enhanced border initiatives.

112

ATTACHMENT I

INVESTIGATIVE EXAMPLES

The following examples attempt to illustrate the nature,
complexity and diversity of organized crime cases that Customs
investigates as a matter of priority and mission.

FSU criminal syndicates are active in at least four areas
directly relevant to Customs enforcement programs: drug
smuggling, money laundering, commercial fraud, and the smuggling
of other illegal contraband, including weapons, strategic
minerals, precious metals, icons, and stolen vehicles.

Heroin Smuggling

During June, 1991, New York Customs Agents initiated an
investigation into heroin smuggling activities as a result of the
arrest of two Russian couriers who arrived at JFK international
airport with an aggregate amount of 3.209 grams of heroin
secreted in body girdles. The heroin originated in Thailand.
This investigation disclosed the existence of an extensive
network of heroin couriers, comprised of Russian, and former
Russian nationals who were entering the United States at New
York, and Boston on a bi-monthly basis.

This investigation provided substantial insight into the
insular world of drug trafficking by FSU criminal enterprises by
illustrating the complexity of investigating an unique divergence
of both culture and language. With the advent of heroin's
resurgence in America, this investigation ultimately dismantled a
network of heroin couriers who possessed the potential to supply
a major portion of the eastern coast of the United States.

The arrest of the two couriers ultimately evolved into a
five year investigation which revealed the smuggling of heroin
via individual courier, and the international mail system. What
remained consistent throughout this investigation was that the
consignee was always within the confines of the Russian emigre
community of New York city.

This joint Customs/DEA investigation ultimately concluded in
1995 with the arrests and convictions of fourteen defendants and
the seizure of 5,922 grams of heroin. While this single
investigation does not infer that all Russian travelers or
emigres in the United States are involved ih these criminal
activities, the distinct insularity of the Russian community
within the United States in terms of cultural and social norms
greatly aids in the concealment and expansion of these
activities.

113

EXPORTING OF STOLEN CARS

There are a number of ongoing Customs stolen car export
cases throughout the country involving FSU emigres. A good
American car is selling anywhere from two to three times its
value m the FSU. Law enforcement has determined that emerging
organized crime groups utilize the stealing, illegal exportation,
and sale of stolen vehicles as a relatively safe way to obtain
capital to finance their other criminal ventures, drugs, weapons,
etc. The current cars of choice are four wheel drive vehicles.
Several Customs investigations from around the country are
currently underway into the illegal exportation of stolen
vehicles from the U.S. to FSU countries. The minimum value of
the vehicles, luxury cars and construction equipment, recovered
by Customs so far, totals $25,000,000, and we have made 77
arrests .

One case of particular interest is a SAC Chicago case. A
group of FSU emigres were shipping vehicles that were stolen in
New York, driven to Chicago and secreted inside containers and
exported to the FSU. A number of arrests have been made in this
case. One of the individuals arrested was Ritchardas
VASILIAVITCHIOUS believed to be the organizer/ leader of this
group. VASILIAVITCHIOUS was once the bodyguard for Monya EISON,
but they had a disagreement, and VASILIAVITCHIOUS was shot and
wounded in New York and fled to Chicago. In the New York area,
other FSU emigre stolen car groups have been dismantled by
Customs and local authorities.

Agents of the United States Customs Service, SAC Miami,
and detectives of the Metro-Dade Auto Theft Task Force
investigated Paulo and Nikita KOBIAKOV and other members of a
group involved in the exportation of stolen vehicles to
Venezuela, Ecuador and the Dominican Republic.

The investigation into this group was initiated during
November 1994, with the recovery and seizure of stolen vehicles
which were being exported from Port Everglades to La Guira,
Venezuela. Agents and detectives gathered information on several
seizures and events which were eventually linked to the KOBIAKOVS
and two Florida corporations.

On January 20, 1995, as a result of the investigation,
Nikita KOBIAKOV was arrested and charged with dealing in stolen
property. Once Nikita was freed on bond he fled the United
States and took up residence in Venezuela. Paulo KOBIAKOV
then took over the U.S. operations while Nikita coordinated
distribution of the stolen vehicles in South America. Due to the
lack of effective export controls in South America it is believed
that a number of the vehicles were shipped to Europe and possibly
the former Soviet Union in a money laundering and narcotics
smuggling venture.

During October 1995, information provided by a confidential

114

source and the surveillance of two warehouses resulted in the
seizure of vehicles and the identification of several violators.
While tracking down undeveloped leads, more and more information
pointed to the involvement of the KOBIAKOVS and their Florida
corporations .

This information was presented before a Grand Jury in the
Southern District of Florida, resulting in the indictment of
Nikita and Paulo Kobiakov and 10 members of the group for
violating and conspiring to violate Federal law.

Fraudulent Avionics and Radio Parts Case

Several investigations involve the sale, export and/or
diversion of weapons, military hardware, critical high
technology, precursor chemicals for biological warfare, military
aircraft parts, and assorted missile systems. Some of these
investigations are long-term in nature and involve complex
international conspiracies that affect our national security
and/or related foreign policy objectives.

One example to illustrate this type of investigation is from
our Resident Agent in Charge (RAC) Newark office. According
to the U.S. Navy, the Customs Service saved them millions of
dollars by the success of our investigation. If not for the
execution of search warrants, several product components
would have been delivered to them for installation within
our national defense systems.

While this investigation is not a typical "Russian Organized
Criminal activity," in that there is no traditional "mafia
hitmen", or "legbreakers"; it does involve a continuing
criminal enterprise. The violators were from Russia and
Iraq. The material was manufactured in the Ukraine by
unemployed Russian technicians, and the method of payment
utilised indicated money laundering by front companies. If
left unchecked this "enterprise" could very veil have
expanded into another Russian Organizetl Criminal Group
operating within our country.

Customs successfully completed a wide ranging fraud
investigation involving a Newark, New Jersey based company
that was defrauding the U.S. Department of Defense by
importing Russian made avionics, satellite communications,
radar, and radio components and selling the equipment to the
United States under military contracts as U.S. -made parts
and equipment. Two defendants, who are emigres from Russia
and Iran, have been indicted for allegedly defrauding the
Departments of the Army, Navy and Air Force. In addition to
the fraudulent imports, the U.S. company was exporting U.S.
defense technology and data to Russia and Ukraine without an
export license, in order that companies there could
manufacture the avionics and equipment to U.S.
specifications. Defense contracting regulations prohibit

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the manufacture of U.S. weapons systems components by
overseas companies, unless specifically authorized by the
Department of Defense.

New York Zirconium Case

Undercover Customs agents initiated the seizure of 7 tons of
nuclear-grade zirconium being shipped from Ukraine to Iraq
through the U.S. This resulted in three arrests.

In the course of a covert investigation, Customs agents
acting in undercover capacities effected the arrests of
three individuals who were attempting to ship large
quantities of nuclear-grade zirconium to Iraq in violation
of the United States and United Nations sanctions against
Iraq. During the course of this investigation, the
defendants delivered five tons of zirconium, believing it
was destined for Iraq. An additional two tons of zirconium
were delivered to U.S. Customs undercover agents in Cyprus,
ostensibly en route to Iraq. This shipment was detained by
Cypriot authorities, and will be returned to New York as
evidence in the trial.

Three defendants were arrested on June 8, 1995, and the
above mentioned zirconium was seized. The
investigation is continuing with the assistance of
the U.S. Customs offices in Rome, Bonn, and Milan.
Law enforcement agencies in Germany, Italy,
Cyprus, and states of the former Soviet Union are
also cooperating in this investigation.

According to the defendants, the source for the zirconium
was a General in Ukraine. If the source of the zirconium is
indeed Ukraine, this would be the first time weapons-grade
material from the FSU has been seized in the United States,

Detroit Isotope Case

Another investigation involves the seizure of non-
radioactive isotopes that were illegally removed from Russia to
the U.S. The isotopes have a value in excess of $350 million
dollars.

In February 1995, the Royal Canadian Mounted Police in
Toronto, Ontario, requested that U.S. Customs assist in
locating more than five hundred (500) units of non-
radioactive isotopes that were alleged to have been stolen
from the Russian Federation, shipped into Canada, and then
imported into the United States, by Russian organized crime
figures.

On February 3, 1995, the SAC Detroit executed Federal search
warrants at the warehouse and recovered the stolen isotopes.

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The wholesale value of the isotopes has been placed at
520 - $30 million with a retail value of between $300 - $350
million dollars. A coordinated investigation is being
conducted by the SAC Detroit along with the Royal Canadian
Mounted Police and the Central Unit for Organized
CriiT.e/Prosecutor General Office, Russian Federation.

MONEY LAUNDERING

In recent months a number of FSU emigres have been
arrested/stopped by Customs for failure to declare
currency/monetary instruments. In one case, the suspect had
$90,000 in U.S. money orders on his person. This is a typical
method used by many money laundering groups. Another individual
was stopped with $170,000 in cash. He claimed that it was the
payroll for a Russian baseball team known as the Red Devils that
were in Florida. This individual has been connected to a FSU
emigre who was arrested by Customs attempting to smuggle
marijuana into the United States secreted inside caviar cans.

As stated previously the FSU is facing a serious threat
regarding the illegal export of funds/assets to other countries.
While some legitimate capital flight is involved, there is
significant indication that many of these funds originate from
fraud, theft and organized crime activities. One technique
believed being used, is that money derived from criminal activity
is handed off to couriers at various foreign airports and
delivered to Moscow. There the money is legalized through
commercial banks, and transferred to European banks in accordance
with false contracts between Russian and foreign firms. The
money is also laundered by purchasing prime real estate
throughout the world, in such places as, England, Monte Carlo,
French Riviera, and the United States.

In many parts of the United States a number of entrepreneur
class criminals have been investing in real estate with cash
purchases from $200,000 condominiums to $2,000,000 for parts of
shopping malls. Another way the money is laundered is the
legitimate purchase of commodities that are then exported to the
FSU and sold at an enormous profit. In the early stages of the
collapse of the Soviet Union it was reported that Russian
organized crime groups in the United States sold rubles for U.S.
currency to the Colombian Cartels. The Cartels then bought gold,
oil and strategic metals through front companies in Russia. The
goods were then sold on the world market, effectively laundering
the Cartels' money and providing the Russian organized crime
groups with U.S. dollars.

To provide another example, on July 15, 1994, U.S. Customs
agents in Seattle received information that a Russian male, who
was an Organized Crime figure from Vladivostok, boarded the
Russian vessel KAPITAN MAN, in Tacoma , Washington in June 1994,
on three occasions. The subject was identified as being involved
in criminal activity in Russia.

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Based on this information a Customs Treasury Enforcement
Communications System (TECS) record was created. On November 4,
1994, Customs inspectors at SEATAC International airport
detained the subject for failure to declare United States
currency. A search revealed he had $20,209 in United States
currency. Customs notified the Department of State of the
information concerning the subject and requested that if the
subject applied for a visa for future travel to the United States
it be denied. Since that time Customs has been advised that the
subject had been denied re-entry into the United States, after
the American Counsel General-Vladivostok confirmed the subjects' s
prior status as the godfather of the Vladivostok mafia, and
involvement in a prior homicide. The subject is allegedly
attempting to get a Russian passport under a new name so that he
can re-enter the United States. State Department has been
advised of this information.

STOLEN PROPERTY AKD MONEY LAUNDERING

Another scheme utilized by Russian organized crime groups
to finance their operations is the purchase of merchandise in our
country by checking accounts with insufficient funds.

On November 21, 1995, Sergey Alexsandrovich GARKUSHA was
arrested as he attempted to depart Seattle-Tacoma International
Airport via Aeroflot Airlines destined for Moscow. GARKUSHA was
in possession of merchandise valued at over $50,000, purchased
with checks from a closed bank account. It was later determined
GARKUSHA purchased merchandise from EUROPE DISTRIBUTORS, paying
by check from an account bearing non-sufficient funds. GARKUSHA
was arrested.

GARKUSHA was subsequently prosecuted and convicted in King
County District Court in Washington. GARKUSHA was sentenced to
credit for time served with partial restitution. GARKUSHA was
remanded to INS custody and was deported from the United States
on January 17, 1996.

ICONS

The illegal export of icons from the FSU by organized crime
groups is also another problem being addressed by U.S. Customs.
According to Russian authorities, the icons are not allowed to be
exported out of Russia, except with permission for exhibition
purposes, because they are considered a national treasure. Every
person entering or leaving Russia has to fill out a customs
declaration form which contains a line item that specifically
addresses the requirement to declare the possession of icons.

Icons depict religious figures of the Russian Orthodox
Church and were commissioned and painted primarily for churches.
They may depict any one of a hundred or more persons, and may
vary stylistically (particularly in the facial features) by the
artist or geographic region where they were painted.

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After the Russian revolution in 1915, churches were looted
and destroyed. Under communism all religious practice was
prohibited and all church/religious property became the property
of the state. With the fall of communism and the breakup of the
former Soviet Union, religious worship was no longer against the
law.

The Russian Orthodox Church is now recognized as a main
force in maintaining the Russian heritage and culture, and all
icons are considered to be property of the Church. Most icons
are kept in museums or churches and are well protected. A
commission has been established to register icons with a unique
number; all icons that do not have a number are turned over to
the Church.

Icons were being sold in Russia several years ago (before
the fall) for approximately $200 each. Estimates are that the
icons would sell for up to $2,000 currently.

Another case occurred on November 11, 1993, at Cincinnati
International airport. Three Russian icons. were seized after
inspectors discovered a false-sided suitcase. The three icons
examined were of very good quality, did not have a registration
number on them, and are considered as cultural heritage items
belonging to the Russian Orthodox Church. These icons were
returned to the Russian authorities.

OTHER ORGANIZATIONS and INTERESTS

There are various estimates on the number of Russian groups
operating in the United States. Some estimates range from 3-4 to
approximately 24 different organizations. The following are some
of the major organizations in which Customs maintains an ongoing
investigative and law enforcement intelligence interest in:

Most of Customs efforts have been directed at the
ORGANIZASITYA which is based in New York but which has cells on
the West Coast, Denver, Colorado, and in the South (Miami) .
Overall, there is evidence of Russian criminal activity in New
York, California, Florida, Illinois, Maryland, Michigan, Ohio,
Oregon, Pennsylvania, Washington State, Massachusetts, and
Colorado. The chart behind me illustrates several FSU Organized
crime groups and their areas of interest.

The ORGANIZATSIYA. This group is comprised of Russian,
Ukrainian, Armenian and Georgian criminals within the Brighton
Beach area of Brooklyn, New York. The ORGANIZATSIYA has been in
operation in the United States since the middle 1970' s with the
first influx of Jewish emigres from the FSU. The true structure,
size and operational components of the ORGANIZATSIYA are not
entirely known since there is limited available intelligence,
investigative and source information. The composition of the
ORGANIZATSIYA appears to be separate cells that cooperate in
situations of mutual interest and shift alliances to meet

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particular needs.

Finally, the BRANDWAIN Group is based in Brussels, Belgium.
BRANDWAIN is reported to be the godfather of Russian criminal
exiles in Belgium. He is listed as the president of various
corporations, many of which have commercial- linkages to the
United States. He is also believed to be involved in narcotics
trafficking, money laundering, extortion, murder and the
smuggling of stolen autos/parts into the FSU.

In the United States, there are a variety of Estonian,
Lithuanian and Armenian groups which are engaged in organized
crime. Numerous investigations have been initiated regarding
organized crime from the former Soviet Union. These cases have
been centered in Philadelphia, Pennsylvania; California;
Connecticut; and New York.

Trade fraud cases connected to FSU emigre crime are
beginning to grow. Recent cases have involved marking violations
on polished diamonds, uranium, caviar, and pianos.

U.S. Customs weapons smuggling cases to date have largely
been concerned with relatively low-level military armaments and
materials such as AK-47 assault rifles, plastique, and night
vision devices.

FOGITIVE ISSUES

Currently, we do not have any major fugitive problems
relating to Russian organized crime. However, we do have several
fugitives that are associated with Russian Organized Crime. The
Customs crimes that they have been indicted for include, money
laundering, vehicle theft, fraud, arms smuggling, and narcotics
smuggling. With the projected rate of Russian organized crime in
the United States and their projected involvement in trans-
national crimes, it is envisioned that fugitive issues will
become more prevalent in the near future.

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STATEMENT OF JIM E. MOODY
DEPUTY ASSISTANT DIRECTOR

CRIMINAL INVESTIGATIVE DIVISION
FEDERAL BUREAU OF INVESTIGATION

ON BEHALF OF FBI DIRECTOR LOUIS J. FREEH, I APPRECIATE
THE OPPORTUNITY TO TESTIFY BEFORE YOUR COMMITTEE AND DISCUSS SOME
ISSUES RELATED TO RUSSIAN, EASTERN EUROPEAN AND EURASIAN CRIMINAL
ENTERPRISE GROUPS THAT ARE A CONCERN TO THE FBI, AS WELL AS THIS
COMMITTEE. IT IS THE FBI'S BELIEF THAT THE EMERGENCE IN THE
UNITED STATES OF THESE VERY DANGEROUS, CRIMINALLY DIVERSE AND
ORGANIZED GROUPS HAS CAUSED A SIGNIFICANT EXPANSION OF OUR CRIME
PROBLEM. THE FBI IS TAKING AN AGGRESSIVE STANCE IN ADDRESSING
THESE CRIMINAL ENTERPRISES, DOMESTICALLY AND INTERNATIONALLY, TO
KEEP THEM FROM BECOMING ENTRENCHED IN THE UNITED STATES.

GRAVE CRIME IS NO LONGER BOUND BY THE CONSTRAINTS
OF BORDERS. SUCH OFFENSES AS TERRORISM, NUCLEAR SMUGGLING,
ORGANIZED CRIME, COMPUTER CRIME, AND DRUG TRAFFICKING CAN SPILL
OVER FROM OTHER COUNTRIES INTO THE UNITED STATES. REGARDLESS OF
ORIGIN, THESE AND OTHER OVERSEAS CRIMES IMPACT DIRECTLY ON OUR
CITIZENS AND OUR ECONOMY.

WE HAVE DEVELOPED A VARIETY OF ANTI -CRIME EFFORTS BOTH
HERE AND ABROAD TO COMBAT THESE DANGEROUS THREATS. THIS EFFORT
HAS BEEN UNDERTAKEN WITH THE SUPPORT OF THE PRESIDENT AND THE
ATTORNEY, GENERAL JANET RENO. ONE OF THE MOST EFFECTIVE WAYS TO
FIGHT INTERNATIONAL CRIME IS BY BUILDING COP-TO- COP BRIDGES
BETWEEN AMERICAN LAW ENFORCEMENT AND OUR OVERSEAS COUNTERPARTS.
WITHOUT THESE RELATIONSHIPS, THERE CANNOT BE THE COMMONALITY OF
PURPOSE AND OPEN COMMUNICATION REQUIRED FOR SUCCESS. MORE AND
MORE OF THESE BRIDGES ARE BEING BUILT, AND SUCCESSES ARE FLOWING
FROM THEM.

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WE ARE USING A NUMBER OF APPROACHES TO DEVELOP
COOPERATIVE LAW ENFORCEMENT PROGRAMS WITH OTHER COUNTRIES.
FOR EXAMPLE, OUR LEGAL ATTACHE PROGRAM WORKS CLOSELY WITH A LARGE
NUMBER OF FOREIGN POLICE FORCES. NOT ONLY DO THEY COOPERATE ON
SPECIFIC CASES, BUT OUR LEGAL ATTACHES -- WHO ARE HIGHLY-SKILLED
SENIOR FBI AGENTS -- ALSO FORM A SORT OF DISTANT EARLY WARNING
SYSTEM TO ALERT US TO NEW AND EMERGING CRIME THREATS.

ANOTHER VERY POWERFUL TOOL IS TRAINING: THE FBI
PLACES A HIGH PRIORITY ON ASSISTING OUR FOREIGN LAW ENFORCEMENT
COUNTERPARTS THROUGH TRAINING COURSES HERE AND ABROAD. AND JUST
A YEAR AGO, WE TOOK A MAJOR COOPERATIVE STEP WITH OTHER FEDERAL
AGENCIES AND OTHER FOREIGN NATIONS WITH THE CREATION OF THE
INTERNATIONAL LAW ENFORCEMENT ACADEMY IN BUDAPEST.

THESE AND OTHER PROGRAMS COMBINE TO HELP GIVE THE
FBI THE CRITICAL FOUNDATION NEEDED TO EFFECTIVELY COMBAT
INTERNATIONAL CRIME.

THIS IS A RARE OPPORTUNITY TO EXTEND THE RULE OF LAW
WHILE MOBILIZING LAW ENFORCEMENT TO MEET THE EXPLOSION OF
INTERNATIONAL CRIME AGAINST AMERICA. WE ARE EXCEEDINGLY GRATEFUL
FOR THE SUPPORT CONGRESS HAS GIVEN US AS WE DEVELOP. A STRONGER
GLOBAL NETWORK OF EFFECTIVE LAW ENFORCEMENT. YOUR SUPPORT OF LAW
ENFORCEMENT TRAINING AT THE DEPARTMENT OF STATE HAS BEEN CRITICAL
TO THE SUCCESS OF OUR PROGRAMS.

THE INTERNATIONAL CRIME PROBLEM

THE POLITICAL, SOCIAL, AND ECONOMIC CHANGES OCCURRING

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IN EASTERN EUROPE AND IN THE FORMER SOVIET REPUBLICS HAVE
PROVIDED SIGNIFICANT, UNINTENDED OPPORTUNITIES FOR ORGANIZED
CRIME GROUPS AND CRIMINAL ENTERPRISES IN THESE COUNTRIES TO
EXPAND INTERNATIONALLY. EVIDENCE THAT ORGANIZED CRIME ACTIVITY
FROM THESE AREAS IS EXPANDING AND WILL CONTINUE TO EXPAND TO THE
UNITED STATES IS WELL -DOCUMENTED.

THESE CRIMINAL ENTERPRISES ARE NOT A NEW PHENOMENON TO
RUSSIA. THEY EXISTED UNDER COMMUNISM. APPROPRIATE LEGAL TOOLS
WERE NOT CREATED TO CONTROL ORGANIZED CRIME AND CORRUPTION
ACTIVITIES. WHEN COMMUNISM DECLINED IN THE SOVIET UNION, THE
ORGANIZED CRIME GROUPS QUICKLY EXPANDED THEIR INFLUENCE IN THE
EMERGING MOVE TOWARD CAPITALISM, AGAIN BECAUSE SUFFICIENT
CONSTRAINTS AND LAW ENFORCEMENT TOOLS WERE NOT PRESENT.

THE FBI HAS MANY YEARS OF SUCCESSFUL INVESTIGATIVE AND
PROSECUTORIAL EXPERIENCE IN THE BATTLE WITH LA COSA NOSTRA AND
OTHER ORGANIZED CRIME GROUPS HERE IN THE UNITED STATES. WE VIEW
ORGANIZED CRIME AS A CONTINUING CRIMINAL CONSPIRACY HAVING A
•FIRM ORGANIZATIONAL STRUCTURE, A CONSPIRACY FED BY FEAR AND
CORRUPTION. THIS DEFINITION CAN ALSO BE APPLIED TO THE ORGANIZED
CRIME THREAT FACING RUSSIA AND MANY OTHER COUNTRIES. MEMBERS OF
A TYPICAL RUSSIAN ORGANIZED CRIME GROUP ARE FOUND AT EVERY LEVEL
OF SOCIETY. ORGANIZED CRIME ACTIVITY IN RUSSIA INCLUDES MONETARY
SPECULATION, MANIPULATION OF THE BANKING SYSTEM, AND EMBEZZLEMENT
OF STATE PROPERTY, AS WELL AS CONTRACT MURDER, EXTORTION, DRUG
TRAFFICKING, PROSTITUTION, PROTECTION RACKETS, AND INFILTRATION
OF LEGITIMATE BUSINESS ACTIVITY.

123

TO MAKE h4ATTERS WORSE, A NUMBER OF RUSSIAN/EURASIAN
ORGANIZED CRIME GROUPS AND CRIMINAL ENTERPRISES PRESENTLY OPERATE
IN THE U.S.

MANY OF THESE CRIMINAL ENTERPRISES ACTIVE IN THE U.S.
HAVE DEMONSTRATED A WILLINGNESS TO WORK IN CLOSE CONCERT WITH
OTHER NON-RUSSIAN/NON- EURASIAN ORGANIZED CRIME GROUPS.

WE HAVE SEEN TWO TYPES OF RUSSIAN CRIMINAL ENTERPRISES
WORKING WITHIN THE UNITED STATES. THE FIRST TYPE MAY BE MORE APT
TO BE CALLED "FRAUD AND ALL OTHER TYPES OF CRIMES, ALL DESIGNED
TO OBTAIN MONEY, PERPETRATED BY RUSSIAN SPEAKING INDIVIDUALS".
IN THIS FRAUD/ FINANCIAL CRIME AREA, IT APPEARS TO BE MORE CRIMES
OF OPPORTUNITY, SOMETIMES ORGANIZED BY INDIVIDUALS , INCLUDING
GOVERNMENT OFFICIALS, ALL DESIGNED TO ILLEGALLY OBTAIN MONEY.

AS WITNESS WHAT HAS ALREADY OCCURRED IN THE UNITED
STATES WITH ALL MANNERS OF FRAUD, MULTI -MILLION DOLLAR GASOLINE
TAX AND MEDICAL INSURANCE FRAUDS FOR EXAMPLE, IT IS BELIEVED THIS
WILL BE A PARTICULARLY MAJOR CRIME PROBLEM FOR THE UNITED STATES.

AS REGARDS ORGANIZED CRIME, THERE IS NO DOUBT THAT
RUSSIAN ORGANIZED CRIME GROUPS, LIKE THE SOLNTSEVSKAYA GROUP AND
THE ORGANIZATSIYA GROUP, EXIST AND ARE QUITE POWERFUL. THESE
GROUPS HAVE MEMBERS HERE IN THE UNITED STATES AND ARE ATTEMPTING
TO GET A FOOTHOLD IN THE U.S. THESE GROUPS WHICH RESORT TO
EXTORTION, KIDNAPING, DRUGS, AND OTHER VIOLENT CRIME FOR SOME OF
THEIR MAIN REVENUE ARE EASIER TO IDENTIFY, COLLECT EVIDENCE
AGAINST AND ULTIMATELY CONVICT AND INCARCERATE.

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IT IS BELIEVED THE KEY FOR U.S. AND WESTERN LAW
ENFORCEMENT, IN NEUTRALIZING THE FINANCIAL 'FRAUDSTERS" AND OC
GROUPS, IS TO IDENTIFY AND CONFISCATE THEIR ILL GOTTEN GAINS,
I.E. THE "MONEY". EFFORTS ARE UNDERWAY IN THIS AREA BUT MUCH
STILL RKMAINS TO BE DONE. IN 1994, THE MVD ESTIMATED THAT $50
BILLION ILLEGALLY LEFT RUSSIA, MUCH OF IT DESTINED FOR THE UNITED
STATES .

THE UNITED STATES AND RUSSIA FULLY REALIZE THE NEED
FOR JOINT COOPERATION AGAINST CRIMES THAT HARM BOTH COUNTRIES --
AND OTHER PARTS OF THE WORLD AS WELL. THAT IS THE REASON THE FBI
HAS OPENED A LEGAL ATTACHE OFFICE IN MOSCOW TO WORK CLOSELY WITH
RUSSIAN POLICE AGAINST A VARIETY OF COSTLY CRIMES. FROM JUI.Y,
1994 TO THE PRESENT, THE NUMBER OF CASES WORKED BY THE FBI AGENTS
IN MOSCOW HAS INCREASED FROM 20 TO OVER 200.

IF CONGRESS AGREES, AND WITH THE COOPERATION OF THE
DEPARTMENT OF STATE AND THE DEPARTMENT OF JUSTICE, WE HOPE TO
EXPAND OUR NETWORK OF LEGAL ATTACHE OFFICES AROUND THE WORLD.
THE GLOBAL NEEDS ARE GREAT -- AND MANY NATIONS, INCLUDING RUSSIA,
ARE WORKING DILIGENTLY TO FIGHT CRIME THAT HURTS THE LAW-ABIDING
EVERYWHERE .

ONE OF THE SPECIFIC ISSUES OF GREAT CONCERN TO THE FBI
AND TO RUSSIAN AUTHORITIES IS THE THEFT AND DIVERSION OF NUCLEAR
MATERIALS -- AND THE POTENTIAL THEFT OF NUCLEAR WEAPONS BY
TERRORISTS OR ROGUE NATIONS.

OVER THE PAST YEAR, LEGITIMATE CONCERNS HAVE BEEN
RAISED BY THE APPARENT VULNERABILITY OF RADIOACTIVE MATERIALS

125

TO THEFT OR DIVERSION IN SEVERAL AREAS OF EASTERN EUROPE AND
EURASIA. THE SEIZURE OF SIGNIFICANT AMOUNTS OF CESIUM IN
LITHUANIA AND THE SEIZURE OF URANIUM IN THE CZECH REPUBLIC
ARE EXAMPLES OF THE CONCERNS IN THE INTERNATIONAL COMMUNITY
REGARDING THE THREAT OF NUCLEAR PROLIFERATION.

THE RECENT INCREASES IN RADIOLOGICAL -NUCLEAR MATERIAL
INCIDENTS THROUGHOUT THE WORLD HAVE CAUSED THE INTERNATIONAL LAW
ENFORCEMENT COMMUNITY TO COMMUNICATE BETTER WITH EACH OTHER.

ALTHOUGH THERE HAVE BEEN NO SEIZURES OF NUCLEAR
MATERIAL IN THE UNITED STATES, TWO RECENT CASES INVOLVED
CONSPIRACIES TO IMPORT RADIOACTIVE MATERIAL INTO THIS COUNTRY.
IN NEW YORK, THE UNITED STATES CUSTOMS SERVICE ARRESTED FOREIGN
NATIONALS ATTEMPTING TO NEGOTIATE THE SALE OF RADIOACTIVE
ZIRCONIUM METAL INTO THE UNITED STATES ULTIMATELY, 45 TONS OF THE
MATERIAL WERE SEIZED IN CYPRUS, ENROUTE TO THE UNITED STATES
IN THE OTHER CASE, THE CANADIAN CUSTOMS SERVICE INTERCEPTED
RADIOACTIVE ISOTOPES ORIGINATING IN RUSSIA BEING SMUGGLED INTO
THE UNITED STATES THROUGH CANADA. THE FBI ASSISTED THE CANADIAN
LAW ENFORCEMENT AGENCIES IN THEIR INVESTIGATION.

WHILE SOME CRIME PROBLEMS FLOW FROM EAST TO WEST,
OTHERS FLOW BACK FROM WEST TO EAST. ONE OF THE MOST DIFFICULT
LAW ENFORCEMENT PROBLEMS FACING MANY OF THE NEWLY -FREED AND
EASTERN EUROPEAN NATIONS IS DRUG TRAFFICKING. THE SCOURGE OF
DRUG TRAFFICKING HAS HAD A DEVASTATING IMPACT ON THE ENTIRE
GLOBAL COMMUNITY. RUSSIA, THE NEWLY INDEPENDENT STATES AND
EASTERN EUROPE ARE CERTAINLY NOT IMMUNE TO THIS EPIDEMIC.

25-049 0-96-5

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CRIMINAL ORGANIZATIONS IN THESE EMERGING DEMOCRACIES ARE TAKING
ADVANTAGE OF THE RELAXED BORDERS AND IMPROVED TELECOMMUNICATIONS
SYSTEMS THAT HAVE EMERGED IN RECENT YEARS TO FACILITATE THEIR
ILLEGITIMATE OPERATIONS. THESE COUNTRIES ARE TARGETS OF
OPPORTUNITY FOR "^HE MAJOR DRUG TRAFFICKING ORGANIZATIONS, LIKE
THE COLOMBIAN CARTELS, WHICH SEEK TO ESTABLISH NEW AND LUCRATIVE
MARKETS.

IWTBRKATIONAL TRAINING

THE FBI'S INTERNATIONAL APPROACH IN COMBATING RUSSIAN
AND OTHER INTERNATIONAL ORGANIZED CRIME GROUPS INCLUDES GENERAL
AND SPECIALIZED LAW ENFORCEMENT TRAINING FOR FOREIGN LAW
ENFORCEMENT AGENCIES. DURING FISCAL YEAR (FY) 1995, THE FBI
TRAINED 4,400 FOREIGN LAW ENFORCEMENT PERSONNEL. THIS TRAINING
IS PARTICULARLY CRITICAL WITH RESPECT TO THE POLICE AGENCIES, OF
SOME OF THE NEWLY -EMERGING DEMOCRACIES.

MOST OF THIS TRAINING IS ACCOMPLISHED BY FUNDING
GENEROUSLY MADE AVAILABLE BY CONGRESS TO THE DEPARTMENT OF STATE
THROUGH THE FREEDOM SUPPORT ACT (FSA) AND SUPPORT FOR EASTERN
EUROPEAN DEMOCRACIES (SEED) FUNDING. THE FBI AND THE DEPARTMENT
OF STATE, WORKING TOGETHER, ARE ALSO RESPONSIBLE FOR THE
INTERNATIONAL LAW ENFORCEMENT TRAINING ACADEMY IN BUDAPEST, WHICH
FUNCTIONS AS THE CENTER FOR LAW ENFORCEMENT TRAINING FOR OFFICERS
FROM MANY EASTERN EUROPEAN, RUSSIAN AND EURASIAN NATIONS.

THE ACADEMY AT BUDAPEST PROVIDES AN EIGHT-WEEK
PROFESSIONAL DEVELOPMENT PROGRAM SIMILAR TO OUR FBI NATIONAL

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ACADEMY PROGRAM AT QUANTICO. DURING FY 1995, A TOTAL OF THREE
CLASSES GRADUATED FROM THE BUDAPEST ACADEMY -- EACH OF 33 MID-
LEVEL POLICE OFFICERS. THOSE OFFICERS CAME FROM THE CZECH
REPUBLIC, HUNGARY, LATVIA, POLAND, ROMANIA, SLOVAKIA, ESTONIA,
AND LITHUANIA.

FOR FY 1996, THE SCHEDULE IS MUCH MORE AGGRESSIVE,
CALLING FOR APPROXIMATELY 200 PERSONS TO BE TRAINED FROM THE
FOLLOWING COUNTRIES: ALBANIA, BELARUS, BULGARIA, CROATIA,
ESTONIA, HUNGARY, KAZAKHSTAN, KYRGYZSTAN, LATVIA, MACEDONIA,
MOLDOVA, POLAND, RUSSIA, SLOVENIA, AND UKRAINE.

WE CAN BE IMMENSELY. PROUD OF THE ACADEMY AT BUDAPEST.
IT IS A DIRECT OUTGROWTH OF DIRECTOR FREEH'S TRIP TO EASTERN
EUROPE IN 1994 AND PRESIDENT CLINTON'S DIRECTION TO UNITED STATES
GOVERNMENT AGENCIES TO JOIN TOGETHER TO BUILD THE WORLD'S
CAPABILITIES IN FIGHTING INTERNATIONAL CRIME. THE ACADEMY
REPRESENTS THE COMBINED EFFORTS OF THE DEPARTMENT OF STATE (DOS) ,
THE DEPARTMENT OF JUSTICE (DOJ) , THE FBI, THE DRUG ENFORCEMENT
ADMINISTRATION (DEA) , THE INTERNAL REVENUE SERVICE (IRS), THE
UNITED STATES SECRET SERVICE (USSS) , THE FEDERAL LAW ENFORCEMENT
TRAINING CENTER (FLETC) , THE ALCOHOL TOBACCO AND FIREARMS (ATF) ,
AND OTHER AGENCIES AND COUNTRIES. IT IS TRULY A CASE WHERE ALL
OF THESE LAW ENFORCEMENT AGENCIES ARE WORKING TOGETHER AS
PARTNERS TOWARD A COMMON GOAL. I CANNOT SPEAK HIGHLY ENOUGH
ABOUT THE CONTRIBUTIONS DEA, SECRET SERVICE, IRS, ATF AND THE
FEDERAL LAW ENFORCEMENT TRAINING CENTER IN THE DEPARTMENT OF
TREASURY HAVE MADE IN MAKING THE ACADEMY SUCCEED. THE ACADEMY

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BRINGS TOGETHER SEASONED INVESTIGATORS AS INSTRUCTORS AND LAW
ENFORCEMENT OFFICERS FROM ACROSS EASTERN EUROPE, RUSSIA, AND THE
NEWLY INDEPENDENT STATES TO LEARN POLICING UNDER THE RULE OF LAW.
WE ARE ESPECIALLY GRATEFUL TO OUR HOST COUNTRY, HUNGARY.

ON APRIL 22,1996, ATTORNEY GENERAL RENO AND DIRECTOR
FREEH, ALONG WITH HIS OTHER COUNTERPARTS FROM THE UNITED STATES
WERE HONORED TO ATTEND THE DEDICATION OF THE INTERNATIONAL LAW
ENFORCEMENT ACADEMY. WITH THE RECENT COMPLETION OF RENOVATIONS,
THE CAPACITY OF THE ACADEMY HAS BEEN EXPANDED. THE DEDICATION
WAS AN HISTORIC MOMENT IN INTERNATIONAL LAW ENFORCEMENT.

THE FBI ALSO IS INVOLVED IN FOREIGN POLICE TRAINING
IN MANY OTHER VALUABLE WAYS. FOR EXAMPLE, IN FY 1995,
THE FBI PERFORMED A TOTAL OF 10 IN-COUNTRY TRAINING NEEDS
ASSESSMENTS. IT WORKS THIS WAY: AT THE INVITATION OF THE
HOST GOVERNMENT, WE ANALYZE THAT COUNTRY'S POLICE TRAINING NEEDS
AND CAPABILITIES. WE THEN MAKE A RECOMMENDATION OF HOW WE
BELIEVE WE CAN BEST ASSIST THE HOST COUNTRY'S LAW ENFORCEMENT
CAPABILITIES THROUGH SPECIFICALLY TARGETED TRAINING." THE
ASSESSMENTS WERE CONDUCTED IN ALBANIA, BELARUS, BULGARIA,
ESTONIA, INDIA, KAZAKHSTAN, KYRGYSTAN, LATVIA, LITHUANIA,
MOLDOVA, PARAGUAY, PERU, POLAND, ROMANIA, TUNISIA, UKRAINE, AND
URUGUAY .

THROUGH THE FBI'S IN -COUNTRY TRAINING PROGRAM, THE FBI
CONDUCTS ONE AND TWO-WEEK SCHOOLS IN FOREIGN NATIONS WHICH
CONCENTRATE ON POLICE OPERATIONS AND TECHNICAL SKILLS. WE
USE SEASONED, SENIOR FBI STREET AGENT INSTRUCTORS WHO USE

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THEIR EXTENSIVE PRACTICAL EXPERIENCE IN TRAINING OUR FOREIGN
COUNTERPARTS IN POLICING UNDER THE RULE OF LAW. THE INSTRUCTORS
IN THESE PROGRAMS HAVE AN ESTABLISHED EXPERTISE IN CRIMINAL
INVESTIGATIONS, ESPECIALLY ORGANIZED CRIME AND WHITE COLLAR
CRIME. THEIR CREDIBILITY IS NOT ONLY ESSENTIAL FOR EFFECTIVE
INSTRUCTION BUT ALSO IS VERY EFFECTIVE IN BUILDING THE COP-TO-COP
BRIDGES THAT WE SO CRITICALLY NEED.

SINCE THE FIRST OF THE YEAR, WE HAVE TRAINED 212
OFFICERS OF THE MINISTRY OF INTERIOR FOR THE RUSSIAN FEDERATION
(MVD) IN SEMINARS HELD IN RUSSIA AND AT THE FBI ACADEMY IN
QUANTICO. ALONG WITH THE INSTRUCTION GEARED TO THE INVESTIGATION
OF CRIMES, WE HAVE PROVIDED TRAINING IN ETHICS AND INTERNAL
POLICE CONTROLS -- THE FIRST TIME THAT THIS HAS EVER BEEN DONE
AND AN AREA WHICH IS CRITICAL TO THE SUCCESS OF POLICING UNDER
THE RULE OF LAW.

OUR IN-COUNTRY TRAINING PROGRAMS ARE PRIMARILY FUNDED
THROUGH THE FSA AND SEED FUNDS WE RECEIVE FROM THE DEPARTMENT OF
STATE. THE FBI, ALONG WITH OTHER LAW ENFORCEMENT AGENCIES,
SUBMIT PROPOSED INTERNATIONAL TRAINING PLANS TO THE DEPARTMENT OF
STATE AT THE BEGINNING OF THE FISCAL YEAR. DEPENDING ON THE
FUNDING THAT IS AVAILABLE FOR LAW ENFORCEMENT TRAINING, THE
DEPARTMENT OF STATE THEN DETERMINES THE FUNDING AMOUNTS FOR EACH
AGENCY .

DURING THE PAST TWO YEARS, THE FBI HAS RECEIVED $8.3
MILLION OF THESE FUNDS FOR OUR TRAINING INITIATIVE. WE HAVE
BEEN VERY PLEASED WITH THE SUPPORT WE HAVE RECEIVED FROM THE

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DEPARTMENT OF STATE -- ALL THE TRAINING WE HAVE PROPOSED HAS BEEN
FUNDED. IN ADDITION, THE FBI HAS USED $300,000 OF ITS
APPROPRIATED FUNDING TO PROVIDE LIMITED TRAINING TO LAW
ENFORCEMENT IN OTHER COUNTRIES.

IN FY 1995, THE FBI PROVIDED FSA AND SEED SUPPORTED
TRAINING SEMINARS TO OVER 1,800 LAW ENFORCEMENT OFFICERS FROM
HUNGARY, POLAND, SLOVAKIA, CZECH REPUBLIC, ESTONIA, LATVIA,
LITHUANIA, UKRAINE, RUSSIA, ROMANIA, AND MOLDOVA. IN FY 1996,
WE WILL EXPAND OUR TRAINING INTO BELARUS, SLOVENIA, KAZAKHSTAN,
KYRGYSTAN, BULGARIA, AND ALBANIA. THE TRAINING PROVIDED IS
TAILORED TO MEET THE NEEDS OF THE PARTICIPANTS. TOPICS ADDRESSED
INCLUDE BANK ROBBERY, DRUG TRAFFICKING, KIDNAPPING, FINANCIAL
CRIMES, WHITE-COLLAR CRIME, ORGANIZED CRIME AND TERRORISM. JUST
RECENTLY, FOR EXAMPLE, WE CONDUCTED A WHITE-COLLAR CRIME AND
CORRUPTION SEMINAR IN KAZAKHSTAN. ALL OF THIS TRAINING HAS A
DIRECT IMPACT ON UNITED STATES PERSONS AND CORPORATIONS WHO HAVE
FLOCKED TO THESE COUNTRIES IN SEARCH OF BUSINESS OPPORTUNITIES.

IN ADDITION TO THE TRAINING FUNDED BY THE FSA AND SEED
ACTS, THE FBI TRAINED AN ADDITIONAL 2,600 STUDENTS THROUGH OUR
OTHER PROGRAMS. THESE PROGRAMS INCLUDED THE CRIME-SPECIFIC
INVESTIGATIVE SEMINARS, TARGETED CRIME SCENE ANALYSIS TRAINING
AS PROVIDED BY OUR FORENSIC EXPERTS, AND MANAGEMENT TRAINING
FOR MID- LEVEL AND EXECUTIVE LAW ENFORCEMENT OFFICERS. LAST YEAR,
110 INTERNATIONAL OFFICERS ALSO PARTICIPATED IN THE FBI NATIONAL
ACADEMY PROGRAM AT QUANT I CO. THEIR PARTICIPATION ALLOWS AN
ADDITIONAL "BRIDGE" TO BE BUILT FROM OUR STATE AND LOCAL OFFICERS

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TO THOSE OVERSEAS.

ONE BENEFICIAL PART OF THIS TRAINING IS THE OPPORTUNITY
IT PROVIDES THE TRAINERS AND THE TRAINEES TO INTERACT ABOUT
SPECIFIC CRIME PROBLEMS BEING ENCOUNTERED IN THEIR COUNTRIES, HOW
TO ADDRESS THE PROBLEM, SHARE EXPERIENCES LEARNED IN THE PROCESS
AND FORGE NEW RELATIONSHIPS FOR FUTURE COOPERATION ON MATTERS OF
MUTUAL INTEREST AND CONCERN. IN SOME OF OUR INVESTIGATIONS, THE
FBI HAS BENEFITTED BY BRINGING ACTUAL CASE INVESTIGATORS TO THE
UNITED STATES FROM OTHER NATIONS TO WORK SIDE BY SIDE WITH FBI
AGENTS .

THIS IS A CONTINUATION OF THE TRAINING WE HAVE PROVIDED AND
ALLOWS "HANDS-ON" APPLICATION AND OBSERVATION OF INVESTIGATIVE
TECHNIQUES SUCCESSFULLY EMPLOYED BY THE FBI IN OUR ORGANIZED
CRIME INVESTIGATIONS.

AS EXAMPLES OF THE SUCCESSES THE FBI HAS SEEN FROM
CONTACTS AND LIAISON ESTABLISHED AS A RESULT OF THIS TRAINING, A
CENTRAL EUROPEAN WORKING GROUP ON INTERNATIONAL ORGANIZED CRIME
WAS ESTABLISHED THIS PAST YEAR AND A SIX-NATION WORKING GROUP ON
INTERNATIONAL ORGANIZED CRIME GREW OUT OF THE GERMAN -AMERICAN
WORKING GROUP. IN ADDITION TO THE FBI, THEY BRING TOGETHER LAW
ENFORCEMENT AGENCIES FROM EASTERN AND WESTERN EUROPE, THE MIDDLE
EAST AND CANADA TO DISCUSS SPECIFIC ORGANIZED CRIME THREATS
COMMON TO ALL COUNTRIES REPRESENTED. LINES OF COMMUNICATION AND
WORKING RELATIONSHIPS ARE NOW ESTABLISHED AND PRACTICAL LAW
ENFORCEMENT APPROACHES TO THE ORGANIZED CRIME PROBLEMS OF THE
REGIONS ARE PLANNED. AS A DIRECT RESULT OF THIS INITIATIVE,

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SEVERAL COUNTRIES WERE, FOR THE FIRST TIME, ABLE TO ESTABLISH
CONTINUING LIAISON COMMUNICATIONS WITH OTHER REPRESENTED
ORGANIZATIONS ON A DIRECT PROFESSIONAL LEVEL AND TO INITIATE
JOINT INVESTIGATIONS.

FOR EXAMPLE, A MULTI-NATIONAL, CASE-SPECIFIC FRAUD
SEMINAR WAS CONDUCTED BY THE FBI'S FINANCIAL CRIMES SECTION FROM
FEBRUARY 18-22, 1996, IN BERLIN, GERMANY. THE PROGRAM DEALT WITH
BANK FAILURES AITO BROUGHT TOGETHER INVESTIGATORS FROM THE UNITED
STATES, LATVIA, NETHERLANDS, RUSSIA, AND GERMANY FOR A PRACTICAL
CASE TRAINING INITIATIVE.

THE RESULTING PRODUCT OF THESE CONSTRUCTIVE MEETINGS IS
AN INVESTIGATIVE ORGANIZED CRIME TASK FORCE, INTERNATIONAL IN
SCOPE, THAT IS TARGETING SIGNIFICANT CRIMINAL ORGANIZATIONS
DETERMINED TO BE A MAJOR THREAT TO MANY NATIONS, INCLUDING THE
UNITED STATES.

THE FBI ALSO PRESENTED A NUCLEAR NON-PROLIFERATION
CONFERENCE AT THE FBI COMPLEX AT QUANTICO, VIRGINIA FROM
APRIL 18-21, 1995, AND TWENTY-EIGHT (28) SEED AND FSA NATIONS
SENT REPRESENTATIVES, INCLUDING, AMONG OTHERS, RUSSIA AND
UKRAINE. THE CONFERENCE OUTLINED THE PROBLEMS OF NUCLEAR
MATERIALS AND WEAPONS PROLIFERATION FROM THE COUNTRIES OF THE
FORMER SOVIET UNION AND COUNTER- PROLIFERATION PROPOSALS AND
TRAINING INITIATIVES. THE CONFERENCE IS INCLUDED AS A FSA
INITIATIVE TO ADDRESS THIS SERIOUS PROBLEM.

THE DEPARTMENT OF DEFENSE AND THE FBI ARE CURRENTLY IN
THE FINAL STAGES OF SUBMITTING THE DOD/FBI COUNTERPROLIFERATION

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PROGRAM REPORT TO CONGRESS REGARDING PLANS TO PROVIDE
INTERNATIONAL TRAINING SEMINARS ON NUCLEAR SMUGGLING. THIS IS
PART OF OUR NUNN-LUGAR FUNDED INTERNATIONAL TRAINING SEMINARS
PROGRAM ON NUCLEAR SMUGGLING.

THE FBI'S NUCLEAR BIOLOGICAL CHErilCAL PROLIFERATION
UNIT IS PRESENTLY IN POSSESSION OF A REPORT COMPILED BY AN FBI
TEAM THAT RECENTLY CONDUCTED A TRAINING ASSESSMENT IN THE CZECH
REPUBLIC. DURING THIS ASSESSMENT, WHICH WAS COORDINATED BY OUR
LEGAL ATTACHE IN VIENNA, THE FBI REPRESENTATIVES FROM THE
INTERNATIONAL COORDINATION UNIT, THE FBI LABORATORY AND THE
ENGINEERING SECTION, MET WITH VARIOUS CZECH LAW ENFORCEMENT
AGENCIES, CZECH NUCLEAR SAFETY OFFICIALS, AND FACULTY MEMBERS OF
THE REZ INSTITUTE.

THIS ASSESSMENT YIELDED VALUABLE INFORMATION REGARDING
THE CONCERNS AND NEEDS OF THE ATTENDING CZECH OFFICIALS. IT IS
PROPOSED THAT THE INFORMATION PROVIDED BY THE CZECHS, WITH REGARD
TO THEIR SPECIFIC REQUIREMENTS, WILL RESULT IN ESTABLISHING A
TRAINING PROTOTYPE FOR OTHER COUNTRIES REQUESTING SUPPORT IN
COUNTERPROLIFERATION MATTERS.

INTERAGENCY WORKING GROUP

AS YOU MAY BE AWARE, THE CONGRESS ESTABLISHED THE
INTERAGENCY WORKING GROUP (IWG) TO MAKE RECOMMENDATIONS AS TO
TRAINING AND OTHER SUPPORT RECEIVED BY RUSSIA, THE NEWLY
INDEPENDENT STATES, ANOTHER EASTERN EUROPEAN COUNTRIES. THIS HAS

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BEEN A SUCCESSFUL ENDEAVOR THAT GREATLY ASSISTS US IN THE PROPER
COORDINATION OF OUR TRAINING EFFORTS ABROAD.

THE IWG ALLOWS ALL FEDERAL LAW ENFORCEMENT AGENCIES TO
PARTICIPATE IN DEPARTMENT OF STATE FSA AND SEED FUNDED TRAINING
INITIATIVES WITHIN THE FORMER SOVIET UNION AND BLOC NATIONS,
BASED ON THEIR RESPECTIVE LAW ENFORCEMENT JURISDICTION.
PARTICIPATION IN THE IWG PREVENTS DUPLICATION AND WASTE OF
RESOURCES. IWG PRIORITIES ARE FORMULATED BY THE DEPARTMENTS OF
STATE, JUSTICE AND THE TREASURY, AS DICTATED BY THE VARIOUS LAW
ENFORCEMENT ENTITIES FROM THOSE DEPARTMENTS, PARTICIPATING ON THE
IWG.

THE FBI PARTICIPATES AS A MEMBER OF THE IWG IN CARRYING
OUT THE PROGRAMS UNDER THE AUSPICES OF THE FSA AND SEED. LET ME
DESCRIBE THE FBI'S ROLE:

* THE FBI, AS THE AGENCY WITH THE BROADEST FEDERAL LAW
ENFORCEMENT RESPONSIBILITY, CONDUCTED A MAJOR PORTION OF THE
TRAINING AND TECHNICAL ASSISTANCE DURING FY 1995, WITH A SIMILAR

•SCHEDULE PLANNED FOR FY 1996 .

* THE FBI HAS EXCLUSIVE TRAINING IN THE AREA OF ORGANIZED
CRIME. OTHER PARTICIPATING AGENCIES LIKE THE DRUG ENFORCEMENT
ADMINISTRATION AND THE BUREAU OF ALCOHOL, TOBACCO, AND FIREARMS,
LIKEWISE HAVE EXCLUSIVE AREAS OF TRAINING BASED ON THEIR
EXPERTISE AND JURISDICTION.

* IN OTHER AREAS, SUCH AS ECONOMIC CRIMES, TRAINING
BY THE UNITED STATES SECRET SERVICE, U.S. CUSTOMS SERVICE,
FINCEN, AND DEA COMPLIMENTS THAT DONE BY THE FBI.

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LEGAL ATTACHE PROGRAM

THE FBI'S LEGAL ATTACHE PROGRAM IS THE SINGLE MOST
SIGNIFICANT FACTOR IN THE BUREAU'S ABILITY TO DETECT, DETER, AND
INVESTIGATE INTERNATIONAL CRIMES IN WHICH THE UNITED STATES OR
OUR CITIZENS ARE THE VICTIMS. BY STATIONING AGENTS ABROAD AND
ESTABLISHING OPERATIONAL LINKS WITH FOREIGN POLICE, THE FBI
SUBSTANTIALLY EXPANDS THE NATION'S PERIMETER OF LAW ENFORCEMENT
PROTECTION. GENEROUSLY FUNDED OUT OF THE COMMERCE, STATE, AND
JUSTICE BILL, THE FBI'S LEGAL ATTACHES ARE TRULY OUR FIRST LINE
OF DEFENSE.

INTERNATIONAL CRIME HAS GROWN ENORMOUSLY IN RECENT
YEARS. TECHNOLOGICAL ADVANCES AND THE END OF THE COLD WAR
PROMPTED DRAMATIC INCREASES IN GLOBAL TRAVEL AND

TELECOMMUNICATIONS. CRIMINALS HAVE USED THESE CHANGES TO THEIR
ADVANTAGE, DIFFUSING THEIR OPERATIONS AROUND THE WORLD TO AVOID
LAW ENFORCEMENT SCRUTINY. THE RELENTLESS GLOBALIZATION OF CRIME
THREATENS AMERICA BOTH AT HOME AND ABROAD -- AND ALL OTHER
LAW-ABIDING NATIONS AS WELL. FOR BETTER OR FOR WORSE, THE
GLOBAL VILLAGE IS NOW A LATE-20TH CENTURY REALITY.

OUR EXPERIENCE SHOWS THAT PLACING FBI AGENTS AT
CRITICAL POSTS ABROAD PROVIDES THE MOST RELIABLE, EFFECTIVE AND
TIMELY MEANS TO COMBAT INTERNATIONAL CRIME -- AND OFTEN AT THE
SOURCE. IT IS ESSENTIAL TO STATION HIGHLY-SKILLED AGENTS IN
OTHER COUNTRIES TO PREVENT FOREIGN TERRORISM AND FOREIGN CRIME
FROM REACHING THE UNITED STATES.

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AT PRESENT, THE FBI HAS IN PLACE IN OUR LEGAL ATTACHE
OFFICES 70 SENIOR AGENTS AND 54 SUPPORT PERSONNEL IN 2 3 NATIONS
AROUND THE WORLD, FUNDED OUT OF FBI OPERATIONAL FUNDS. DURING
FY 1995, THESE OFFICES HANDLED OVER 11,200 MATTERS. THEY ARE THE
CONDUIT THROUGH WHICH LAW ENFORCEMENT INFORMATION AND COOPERATION
FLOWS BETWEEN THE UNITED STATES AND ITS FOREIGN PARTNERS. THEIR
GOAL CAN BE DEFINED SUCCINCTLY: TO KEEP FOREIGN CRIME AS FAR
FROM AMERICAN SHORES AS POSSIBLE, TO KEEP FOREIGN CRIME
PERMANENTLY AT BAY WHENEVER POSSIBLE, TO HELP COMBAT MORE
EFFECTIVELY THOSE CRIMES THAT DO REACH OUR BORDERS. THE WHOLE
POINT IS TO PROTECT THE AMERICAN PEOPLE FROM HARM.

FBI AGENTS STATIONED OVERSEAS ARE NOT INTELLIGENCE
OFFICERS; THEY ARE NOT A SHADOW INTELLIGENCE AGENCY; AND THEY
DO NOT ENGAGE IN ESPIONAGE. THEY ARE LAW ENFORCEMENT AGENTS- -
DEDICATED TO FIGHTING ORGANIZED CRIME, TERRORISM, NUCLEAR
SMUGGLING, VIOLENT CRIME, DRUG TRAFFICKING, AND ECONOMIC CRIME.

LET ME GIVE A FEW EXAMPLES OF THE DIRECT BENEFITS MADE
POSSIBLE BECAUSE OUR AGENTS ARE OVERSEAS AND HAVE THE COP-TO-COP
RELATIONSHIPS WITH HOST AUTHORITIES CRITICAL TO EFFECTIVE LAW
ENFORCEMENT .

* IN A MAJOR MOVE AGAINST A GROWING RUSSIAN ORGANIZED

CRIME STRUCTURE IN THE UNITED STATES, THE FBI LAST YEAR
ARRESTED VYACHESLAV KIRILLOVICH IVANKOV, ALLEGEDLY ONE
OF THE MOST POWERFUL RUSSIAN CRIME LEADERS IN THIS
COUNTRY, ALONG WITH FIVE OF HIS ASSOCIATES ON FEDERAL

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CHARGES OF CONSPIRACY TO COMMIT EXTORTION. THE ARRESTS
IN NEW YORK FOLLOWED AN INTENSIVE FBI INVESTIGATION
THAT WAS AIDED GREATLY BY THE RUSSIAN MINISTRY OF
INTERIOR AND THE ROYAL CANADIAN MOUNTED POLICE AND
MADE POSSIBLE BECAUSE OF OUR LEGAL ATTACHES AND THE
RELATIONSHIPS THAT HAVE FLOWED FROM COOPERATION ABROAD.
THE ARREST WAS BASED UPON FEDERAL ARREST WARRANTS WHICH
CHARGE A TOTAL OF NINE INDIVIDUALS. ACCORDING TO
RUSSIAN LAW ENFORCEMENT AUTHORITIES, IVANKOV FORMED A
SUBSTANTIAL CRIMINAL ORGANIZATION IN RUSSIA BEFORE HE
ENTERED THE UNITED STATES ALLEGEDLY TO MANAGE AND
CONTROL RUSSIAN ORGANIZED CRIME ACTIVITIES IN THIS
COUNTRY. RUSSIAN ORGANIZED CRIME GROUPS USE BUSINESSES
IN THE FORMER SOVIET UNION, WESTERN AND CENTRAL EUROPE,
AND THE UNITED STATES TO SERVE AS FRONTS FOR LAUNDERING
THE PROCEEDS OF ILLEGAL ACTIVITIES AND FOR CONDUCTING
HIGHLY PROFITABLE COMMERCE IN GOODS IN THE SUCCESSOR
STATES OF THE SOVIET UNION, KNOWN AS THE COMMONWEALTH
OF INDEPENDENT STATES. IN NOVEMBER 1994, SEVERAL OF
THE DEFENDANTS ALLEGEDLY BEGAN TO EXTORT SEVERAL
MILLION DOLLARS FROM AMERICAN AND RUSSIAN BUSINESSES.
INTELLIGENCE INFORMATION WAS SHARED ON A CONTINUING
BASIS AMONG THE FBI, THE RUSSIAN MVD AND THE ROYAL
CANADIAN MOUNTED POLICE. FBI LEGAT PARTICIPATION WAS
CRITICAL.

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♦ MOST RECENTLY, FOUR RUSSIANS WERE CHARGED IN NEW YORK
FOR CONSPIRING TO DEFRAUD 24 RUSSIAN COMPANIES,
INCLUDING A CHARITY ESTABLISHED TO AID THE VICTIMS
OF THE CHERNOBYL NUCLEAR DISASTER, OF APPROXIMATELY
$10.8 MILLION.

• IN MOSCOW AS A RESULT OF A JOINT INVESTIGATION BETWEEN

THE FBI AND MVD, EVENGIY BYCHKOV, THE FORMER MINISTER
OF RUSSIAN PRECIOUS GEMS AND METALS WAS REMOVED FROM
OFFICE AND CHARGED WITH VIOLATIONS OF RUSSIAN LAWS.
ALSO CHARGED WITH BYCHKOV WAS ANDRE KOZLENOK, THE
FORMER OWNER AND OPERATOR OF GOLDEN ADA, A DIAMOND
PROCESSING FACILITY.

MANY OTHER IMPORTANT CASES HAVE BEEN MADE POSSIBLE
ONLY BECAUSE THE FBI LEGAL ATTACHES ARE ABLE TO FREELY WORK WITH
OUR FOREIGN COUNTERPARTS TOWARD THE MUTUALLY - SHARED GOAL OF
EFFECTIVE LAW ENFORCEMENT UNDER THE RULE OF LAW.

THE FBI IS DEEPLY GRATEFUL TO CONGRESS FOR THE
SUPPORT AND CONTRIBUTIONS FOR OUR LEGAL ATTACHE PROGRAM. A
RELATIVELY FEW AGENTS BEYOND OUR BORDERS MAKE A CONTRIBUTION OUT
OF PROPORTION TO THEIR SMALL NUMBERS AND THE MODEST AMOUNT OF
DOLLARS SPENT.

AS PART OF THE FY 1996 APPROPRIATIONS PROCESS, OUR
APPROPRIATIONS SUBCOMMITTEES HAVE ASKED US TO PREPARE A PLAN
REFLECTING OUR ASSESSMENT OF BOTH THE SHORT AND LONG-TERM LEGAL

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ATTACHE EXPANSION NEEDS. WE HAVE BEEN WORKING CLOSELY WITH THE
DEPARTMENTS OF JUSTICE AND STATE TO PROVIDE CONGRESS WITH A
CAREFULLY THOUGHT-OUT PLAN DESIGNED TO BETTER MEET THE CHALLENGES
WE FACE FROM EXPLODING INTERNATIONAL CRIME AND TERRORISM. THIS
PLAN -- WHICH IS UNDER FINAL ADMINISTRATIS'^ REVIEW -- IS A
REALISTIC, DOWN-TO-EARTH ASSESSMENT OF THE VAST CHANGES THAT HAVE
OCCURRED IN RECENT YEARS IN THE WORLD, ESPECIALLY IN EUROPE WITH
THE BREAKUP OF THE FORMER SOVIET UNION.

QUITE CANDIDLY, CONGRESS HAS TAKEN PLANNING FOR FBI
LEGAL ATTACHE OFFICES OUT OF THE CHOPPY ONE -YEAR CYCLE AND
PROMPTED US TO DEVELOP A LONG-TERM, COMPREHENSIVE RESPONSE TO A
RAPIDLY CHANGING AND WORSENING INTERNATIONAL CRIME SITUATION.

WE ARE GRATEFUL FOR THE SUPPORT CONGRESS
HAS GIVEN THESE PROGRAMS. IN OUR VIEW, THIS REPRESENTS
CAPITALIZING ON A RARE OPPORTUNITY TO PROTECT OUR CITIZENS BY
BEING BOTH PREPARED AND SUFFICIENTLY AGGRESSIVE AS CRIME MOVES
INTO THE GLOBAL ARENA.

THANK YOU VERY MUCH. THIS CONCLUDES MY TESTIMONY FOR
TODAY .

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STATEMENT OF

EDWARD L. FEDEWCO, Jr.

DIRECTOR, NATIONAL OPERATIONS, CRIMINAL INVESTIGATION

INTERNAL REVENUE SERVICE

BEFORE THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS

MAY 15, 1996

Good Morning Mr. Chairman and distinguished members of the subcommittee.
I appreciate the opportunity to be here today to discuss the internal Revenue Service
Criminal Investigation Division's experience with organized crime from the former
Soviet Union (FSU).

I would like to highlight a significant point that illustrates the impact of financial
investigations — AND the expertise of IRS Criminal Investigation special agents - on
combating organized crime. Nearly everyone has heard of Al Capone, but what you
may not know is that while many federal and state agencies attempted to prosecute
Capone for everything from murder to bootlegging, it took an IRS special agent working
undercover to obtain information that allowed IRS to unravel Capone 's books and
ledgers and to painstakingly build an airtight case against him. America's most
infamous gangster was found guilty and sent to prison for income tax evasion.

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The Capone investigation was certainly not our largest or most complex
investigation; however, it is a perfect example of what we do. When more conventional
investigative techniques fail, we follow the money trail — the proceeds of crime
eventually lead to the criminal. IRS special agents have been doing this for over 77
years. Some of the most notable organized crime figures who could not hide from the
reaches of the IRS were figures such as one of Capone' s henchmen, Waxey Gordon
who was sentenced in 1932 to 10 years in prison for tax evasion; John Gotti who was
sentenced in 1 990 to life in prison - among the charges on which he was convicted was
a Klein conspiracy, which means he attempted to impede and defeat the lawful
collection of income taxes for the years 1984-1989; Rocco Infelise, Chicago's crime
boss who was sentenced in 1 993 to 63 years in prison for running a bookmaking
operation; in February of this year, Anthony (Fat Tony) Morelli, who was sentenced to
20 years for his prominent role in the Red Daisy diesel fuel scheme in Newark; and
Chicago's 74 year old mobster Samuel Carlisi who was sentenced in March 1996 to
1 51 months in prison for failure to pay wagering taxes.
What IRS Does Best

Since our inception as the law enforcement arm of the Internal Revenue Service,
we have always known that greed is the powerful motivation behind the crimes we
investigate. The crimes we investigate, like the greed itself, are found in all strata of
our society. Whenever greed leads to crime, whether income tax evasion or
international money laundering. Criminal Investigation is involved. Our investigations
take us to corporate board rooms as well as to crack houses. IRS Criminal
Investigation special agents fill a unique niche in the law enforcement community, that

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of financial investigators. The special agent's accounting and law enforcement skills
are essential qualities in conducting investigations wfiich have led to the conviction of
high profile criminals who commit increasingly sophisticated financial crimes. The
success of our investigations enhances voluntary compliance by increasing confidence
with the federal tax system and deterring others from engaging in similar conduct.

Criminal Investigation also cooperates closely with other government agencies
to investigate criminal activity. The Bank Secrecy Act, the Money Laundering Control
Act and the provisions of Title 26 of the United States Code outline the role and
responsibilities of the IRS Criminal Investigation Division in investigations that cross
agency boundaries. Thus, our investigations cover not only white collar crime but also
crimes involving illegal industry.

For example, drug dealers have been going to jail for years for the illegal
distribution of narcotics; however, at IRS, we pursue drug dealers not for the drugs but
for their unreported income and for laundering their illegal profits. By focusing our
investigations on the "kingpins" of narcotics, we expend our scarce resources on the
high dollar, high impact investigations where the nation's taxpayers will get the
"biggest bang for their buck." By taking away the thing they prize most, their money,
we are shutting down the drug kingpin's money laundering capabilities and ultimately
stopping the flow of narcotics onto our streets and neighborhoods.
What IRS Knows About Organized Crime

To combat organized crime one must have a thorough understanding of the
criminals involved. This has been particularly true of our efforts to combat motor fuel
excise tax evasion schemes that have been perpetrated by organized crime, and

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especially by organized crime from the former Soviet Union.

We have identified some significant characteristics of individuals involved in
these newly established criminal enterprises.

• They display a remarkable aptitude for sophisticated white collar crime. They
are mostly well educated, many having advanced university degrees in
mathematics, economics and the sciences. They are adept at functioning in a
black market economy and they are skilled at corrupting members of a targeted
industry, in this instance, fuel virholesale distributors and retailers.

• They are ruthless, employing threats, intimidation and violence to further their
aims. The Russians have a long history of settling disputes in the Brighton
Beach, New York area by resorting to murder. Two of the more infamous were
the 1989 slayings of Michael Markowitz and Philip Moskowitz, two major players
in many motor fuel bootlegging schemes. IRS agents, working in undercover
roles, received many threats during the investigation. Threats of violence were
delivered in person or by phone, and in other instances funeral wreaths were
sent to our undercover offices inscribed "Rest in Peace." During the motor fuel
excise tax evasion investigation called "Red Daisy," our undercover offices were
set on fire and burned after our undercover agents failed to heed warnings to
stop competing with mob-controlled firms.

• They are highly adaptable. They work easily with various ethnic groups and
show a willingness to "cut others in" if there is a profit margin for them or if it will
further their enterprises. For example, oil dealer Charles Hurchalla, of Exton,
Pennsylvania, selflessly agreed to allow the government to use his business and

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act as an undercover agent in the $14.8 million Philadelphia investigation. To
gain his cooperation, the Russians presented him with a gold Rolex President
watch worth $15,000 as a bonus or business incentive. During the course of the
investigation the criminals suspected that Hurchaila was acting as a government
agent, so they summoned him to a meeting in New York City to confront him.
They ended up offering him a more lucrative cut of the profits. Hurchaila
advised the IRS that "the Russians believe that everyone has their price and
with enough money almost anyone, whether in government or private industry,
can be corrupted." According to our informants, if this approach does not work,
the Russians have a "join up or die" strategy.

• They are not monopolistic; they are fluid. Their structure is different from

traditional organized crime. We have observed that a group of Russians may
band together to devise and execute a particular scheme and continue in that
mode until they are either stopped by law enforcement or until something better
comes along. There may be a leader of the scheme but there does not seem to
be an organizational hierarchy which continues beyond that particular group.
This has been particularly true in the motor fuel excise tax schemes.

Motor Fuel Excise Tax Evasion

What started out as a novel fraud scheme contrived by a fuel retailer in Long

Island to steal federal and state gasoline taxes quickly evolved into a serious

noncompliance problem resulting in the loss of more than "$1 billion" in revenue

annually. Initially, gasoline was the product of choice.

Gasoline is sold at thousands of retail locations, and gasoline excise tax

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revenues constitute almost 70 percent of the approximately $20 billion in motor fuel
taxes collected annually.

To give you an idea of the money involved, an average tanker truck holds 8
thousand gallons of fuel. The combined federal and state taxes per gallon of fuel can
exceed 40 cents. So, the average tax per tanker is $3,200. The complicated "bootleg"
or "daisy chain' schemes, devised by the Russians, puts that $3,200 per tanker into
their pockets instead of the US Treasury. When one considers that a large scheme
can move 10 to 70 loads of fuel per day, the losses can be staggering! This revenue
that could have been used to build and maintain our national transportation systems
and infrastructure is stolen. These stolen revenues have enriched traditional organized
aime families and furnished the means by which "Russian" organized criminal
elements initially consolidated and ultimately expanded the scope of their sinister
activities in the United States.

To say that these bootleg and daisy chain schemes are complicated, w^ell
planned, well organized operations would be an understatement! Yet they can be
unraveled. We have been doing that successfully for over 10 years. To briefly
demonstrate the complexity of these schemes, the following are some examples of
daisy chain and a bootleg-type operations.
Daisy Chain

A daisy chain scheme is the method which was developed by organized crime
expressly for the purpose of stealing federal and state fuel excise tax revenues. Daisy
chains are schemes \Nh\ch capitalized on weaknesses in our motor fuel excise tax laws.
In the typical daisy chain operation, a complex paper trail of motor fuel transactions is

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created. At some point along the chain, the sale is fictitiously invoiced as tax-paid fuel,
but the company supposedly claiming to have paid the tax turns out to be a fictitious
entity, or an entity with no assets called a "burn" company. By the time auditors and
investigators unravel the series of transactions to determine the tax liability, the so-
called "bum" company has disappeared without a trace of records or assets.

For such an operation to work, ihe perpetrator must be able to purchase fuel tax-
free. In the case of the federal excise tax, this means having a registration number
assigned by the IRS on Form 637, Certification of Exemption. Legitimate registration
numbers have been obtained for fraudulent purposes by buying out registered
companies or falsifying documents of legitimate companies.

The Newark investigation we called "Red Daisy" was an ambitious undercover
operation that exposed organized crime influence in the fuel business in New York,
New Jersey and Pennsylvania organized and executed by Russian emigres under the
protection of mob boss Anthony (Fat Tony) Morelli. The first phase of this multi-part,
two year investigation focused on a scheme vi^iich defrauded the federal and state
governments of $60 million in fuel excise taxes. In this scheme, members of the
Russian "Mafia" paid tribute to members of New York organized crime families
including Mafia godfather, John Gotti. Over 100 million gallons of fuel were sold. The
scope of this operation, its inherent complexity and risks involved were daunting.

During the course of this investigation, hundreds of meetings and over 1200
telephone conversations were recorded and transcribed. Surveillances were
conducted for months and the documentary evidence filled a 1 ,000 square foot storage
area. As the investigation progressed, our undercover agents became so influential in

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the bootleg fuel industry that mobsters warned them to join their operation, get out of
the business, or suffer the consequences. This threat became reality when the building
being operated by the undercover agents was burned to the ground.

In spite of the dangers involved, the Red Daisy was a great success. As of this
date all defendants have been convicted. Moreover, on August 8, 1995, the second
phase of the Red Daisy indictment was announced by a grand jury. This indictment
charged 25 corrupt fuel dealers, along with members of both traditional and organized
crime from the former Soviet Union, with the theft of over $140 million in federal motor
fuel excise tax revenue. This case, currently awaiting trial, is the largest tax evasion
case in history.

In Atlanta, our IRS agents unraveled a complicated daisy chain scheme whereby
Russians attempted to establish themselves in Georgia. Michael Vax, Ilia Miller and
eight other defendants (mostly Russians) fraudulently obtained IRS Form 637
exemption certificates for the purpose of purchasing fuel tax free. They then
constructed an elaborate series of daisy chain schemes to steal the excise taxes
collected from retailers. They took careful steps to conceal their aiminal enterprise,
including the creation of double sets of financial records and structuring cash
transactions to buy fuel for their bootleg business and return cash to co-conspirators
which enabled them to launder their profits. During this investigation, the criminal
enterprise sold over 6,000,000 gallons of diesel and 130,500 gallons of gasoline and
evaded $1.6 million in taxes. Vax and his co-conspirators were charged with
racketeering (RICO) activity, money laundering and tax evasion. All were subsequently
convicted. Vax received a 41 month prison sentence.

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Bootleg Scheme

Bootlegging is a term which denotes any scheme to sell illegal or untaxed
products. (This harks back to the days of prohibition when organized criminals sold
bootleg liquor.) For the Russians, one of the ways in which they get untaxed fuel is by
creating false Forms 637 and presenting them to wholesalers to dupe the wholesalers
into selling them diesel fuel tax free.

In an IRS investigation in California called "Diesel Storm," Joseph Yosi Ezra and
Leah Isaac pled guilty to their involvement in a scheme which stole almost $2 million in
federal excise taxes in just two months. Using false Forms 637, the pair bought over 10
million gallons of diesel fuel tax free and sold it to dealers or at service stations v^ich
they owned, thereby giving themselves a competitive advantage so that they could sell
their fuel at cheaper prices and still make a profit. These are just some of the schemes
investigated around the country. Regardless of size, they dramatically illustrate the
potential damage to our economy that can occur if these schemes go unchecked.

I must point out that fuel excise tax evasion hurts not only the federal and state
governments by depriving them of revenue, but has a profound negative impact on
legitimate fuel distributors and retailers as well. Their market shares erode, their profits
decline and some are even forced out of business. Honest businessmen simply cannot
compete with criminals.
The History of "Fuel"

In the 1980's, the major oil companies sold many of their brand name service
stations and fuel terminals in the New York metropolitan area. Many were

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subsequently acquired by members of various immigrant groups, among them
immigrants from the former Soviet Union. When the potential of motor fuel excise tax
schemes was recognized by organized crime, the Russians were in an ideal position to
sell bootleg gasoline at the stations they controlled.
Gasoline

During 1984-1988, gasoline schemes abounded - and they were large schemes
which often took years to investigate using traditional methods. Further, no matter how
many bootleggers we convicted, more stood ready to become involved in these
schemes because the lure of illicit profits was simply too great.

In 1988, legislative reforms moved the point of taxation on gasoline from the
wholesale distributor level to the terminal rack. This change resulted in substantially
improved compliance. Denied the ability to steal gasoline excise tax revenue, the
Russians quickly began to organize instead diesel fuel evasion schemes. Because the
demand for diesel fuel is much less than gasoline, the Russians were forced to expand
their operations from New York into New Jersey, Pennsylvania, Georgia and Ohio, as
well as other previously unaffected areas.

The diesel fuel evasion problem worsened from 1 988 to 1 991 . We began to
utilize ambitious, deep penetration undercover operations to address this problem, and
we had tremendous success.

For example, over a two year period, beginning in June 1990, taxable gallons of
diesel fuel reported declined in the State of Pennsylvania from 963,484,013 to
932,672,803. This drop in taxable gallons reported and the corresponding drop in
revenue was almost totally attributable to the influence of organized crime.

25-049 0-96-6

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Beginning in March 1993 and continuing through August 1995, our undercover
operations resulted in 10 major indictments. Collectively, these investigations are
some of the most significant in the history of motor fuel prosecutions, involving 136
defendants and over $363 million in evaded taxes. Among these defendants are some
of the highest ranking members of both traditional organized crime and organized crime
from the former Soviet Union. To date, 99 defendants have pled guilty or have been
convicted; the remaining 37 are awaiting trial. These cases are but a part of the 21 1
persons indicted for motor fuel excise tax evasion during the past three fiscal years.

These successful prosecutions, including that of the head of the Russian Mob in
New York, Morat Balagula, and organized crime boss Victor Orena, Jr., helped break
the hold of organized crime on the retail fuel distribution industry in the New York
metropolitan area.
Dyed Fuel

In August 1993, Congress passed the Omnibus Budget Reconciliation Act of
1 993. The Act moved the point of taxation of diesel fuel from the wholesale distributor
level to the terminal rack. Further, this legislation provided that only dyed fuel is
exempt from tax after January 1 , 1 994 and that dyed fuel can not be used on the
highway. It must be used for off-road purposes such as for home heating or farm use.

These important legislative changes, supported by the fuel industry,
revolutionized the situation by further reducing the opportunity for evasion. The
implementation of diesel fuel dyeing was an important step. Formerly, fuel used for tax
exempt purposes was not distinguishable from the taxed product. This made diversion
of the product for illegal purposes a simple matter. Dyed fuel, by contrast, is exempt

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from tax, and because of its vivid red coloring, any attempted use of it on our highways
can be readily discovered by the IRS Examination Division through the spot checking
of temriinals and tmcks. This legislative remedy, however simple it may seem, has
produced significant increases in compliance.
Revenue Enhancements

As a result of these important legislative changes and our investigative
successes, federal diesel fuel receipts increased during calendar year 1994 by
$1,765 billion. Of this increase, $681 million is attributable to the Diesel Compliance
Initiative.

State revenues across the nation have risen an average of almost 7 percent. In
the worst affected states, this increase in revenue was almost 20 percent annually.
Cocktailed Fuel

So is the problem fixed? Not yet. The Russians are quite tenacious. Denied
one avenue to evade taxes, they seek another. One of the current methods of evasion
involves the blending and extending of the volume of taxable fuels. Good fuel is
blended with nontaxed products such as kerosene, waste oil, tranmix, toxic waste and
other products into a mixture called "cocktailed fuel.' Excise taxes are not paid on the
extended volume. This method of evasion extends the taxable fuel plus it takes care of
the high costs of disposing of toxic waste. Criminals are selling these substandard and
dangerous products to unsuspecting retail dealers and motorists in many parts of the
country. This junk is clogging engines and even worse, it is polluting our air.

Another new scheme for the Russians involves purchasing taxed fuel (both
federal and state taxes) in a low tax state such as New Jersey and shipping it to a high

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tax state such as New York. This simple scheme can result in up to a 1 2 cent per
gallon advantage for the criminals in a business in which profit margins are ordinarily 2
to 3 cents per gallon. The State of New York estimates that this type of evasion
scheme has cost them $20 million in revenue in the last 18 months.

During 1994 and 1995, in Los Angeles, California, a group of Armenians and
Russians made a concerted effort to dominate the independent fuel retailing industry by
carrying out daisy chain evasion schemes to steal state excise tax revenues. Before
the recent law changes, this group had previously evaded Federal diesel fuel taxes as
well. On September 13, 1995, 15 members of this group were indicted for tax evasion,
extortion, drug trafficking and the procurement of prostitutes from the former Soviet
Union. Prior to indictment, this group had been actively experimenting with ways to
defeat the new federal diesel fuel laws.

Despite the success we have had in combating motor fuel excise tax evasion
schemes in the past, it would be naive to think that the Russians will simply abandon
their efforts to steal motor fuel excise taxes. We believe they will continue to attempt to
circumvent the law.

It should be noted that no matter how successful the government is in
prosecuting motor fuel excise tax evaders, the Russians are so clever and persistent
that only a comprehensive approach encompassing enforcement, regulation, legislative
reform and close federal, state and industry cooperation can truly curtail their
operations.

Since 1991, IRS has obtained over 190 convictions against many important
members of organized crime and corrupt fuel dealers. The achievements in the fuel

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excise tax evasion area are the result of a collective effort and are a tribute to v^at can
be achieved when government and industry work together. I am proud of the role that
the Internal Revenue Service, and Criminal Investigation in particular, has played in
bringing about these successes.
The Future

We have studied the problems regarding organized crime from the former Soviet
Union as it relates to motor fuel excise tax evasion. We have investigated their
schemes. Congress has implemented significant legislative changes. As a result, we
have seen crime in this area reduced.

I do not want to leave you with the impression that the IRS is only concerned
about the effect of organized crime from the former Soviet Union on the fuel business.
We have seen these groups branch out into some of the more "traditional" areas of
crime. We now have IRS special agents actively involved in investigations regarding
narcotics, health care fraud, insurance fraud, prostitution and diversion of assets
earned in Russia from the sale of natural resources such as oil, timber, and diamonds.

As an example, in California, Russian emigr6 Michael Smushkevich was the
mastermind of a medical diagnostic testing scheme that generated $1 billion of
fraudulent billings to medical insurance carriers. Approximately $300 million was paid
to the Smushkevich organization which was ultimately wired to foreign cities including
Moscow. In September 1994, Smushkevich pled guilty to charges including money
laundering and was sentenced to 21 years. The doctor who ran the clinics, Russian
emigre Bogich Jovovich, also pled guilty to charges including money laundering and
was sentenced to 20 years.

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We recognize that the organized criminal element will not go away any time
soon in America. But, we continue to stay on the paper trail of these organizations.

So, is the problem of organized crime from the former Soviet Union fixed? No.
One means by which these criminal organizations might be more effectively combated
in the future is through international cooperation.

Earlier in this statement, I made numerous observations about the Russians.
Well, there is someone else who is also watching this group of organized criminals very
closely - and they, too have concerns. They are the newly formed Russian
Government's national police, called the MVD, and the Russian Tax Police. We are
joining forces with these officials in areas of mutual concern to create a formidable
force that might just break and hopefully dissolve this threat of organized crime from the
former Soviet Union.

Since March 1995, IRS has taught financial investigative techniques to over 350
law enforcement personnel from the Russian Federation of Tax Police, the Ukraine
Ministry of Finance and state tax inspection police, the Ministry of Finance in Minsk,
Belarus, and mid level managers and criminal investigators of the Russian Tax Police
in St. Petersburg, Russia. The student population ranges from the Assistant Minister of
Finance, to the top Tax Police, to the Ministry of Internal Affairs, to regular tax police.

Additionally, a 12 hour course has been, and is continuing to be, taught by IRS
special agents at the International Law Enforcement Academy in Budapest, Hungary.
This academy is a State Department- sponsored program which has the full support of
the IRS - in fact, IRS Commissioner Margaret Richardson participated in the dedication
ceremonies of the academy in April of this year. Some of the course topics taught by

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IRS include Documentation and Evidence, Indicators of Financial Fraud, Money
Laundering, and Methods of Proof.

Additionally, IRS is part of the assessment team which recently returned from
Moscow. The team includes a representative from the Secret Service, the Federal
Reserve, the Office of the Comptroller of the Currency, and the Federal Bureau of
Investigation. The purpose of the team visit was to conduct a joint needs assessment
for the Russian banking system with an eye to preventing fraud and money laundering.
The recommendations include tighter banking regulations, new money laundering
legislation, and training for law enforcement and the banking community.

During the recent visit to Moscow, the MVD and Tax Police requested that IRS
assign a special agent to the Embassy in Moscow to assist and/or work jointly with
them on investigations involving financial crimes and money laundering. In
coordination with the U.S. Ambassador and the State Department, we are currently
considering their invitation.

With continued vigilance, cooperation and legislative support such as I outlined
here today, we can make great progress.

Mr. Chairman, I will be happy to answer any questions you and the other
subcommittee members may have.

156

STATEMENT OF IGOR NIKOLAYEVICH KOZHEVNIKOV

DEPUTY MINISTER OF INTERIOR

RUSSIAN MINISTRY OF INTERIOR AFFAIRS

Ladies and gentlemen!

Allow rae to express my gratitude for this opportunity to share with you my vision of
the aforeracniioncd issue.

A year and a half ago my colleague Deputy Minister of the Internal Affairs General
Egorov spoke before you about the development of the organized crime in Russia and its
impact on social and economic life of the country.

The analysis of the dynamics and structure of crime demonstrates that the
criminalization process that enveloped most sensitive spheres of the social order, continues
increasing citizens' anxiety for their personal security, safety of their property, life and health
of their loved ones.

Regional separatism ha.s brought about the bitterness of new losses. The embodiment
of this monstrous phenomenon was Dudaev's regime which inflicted incalculable sufferings
not only on the Chechen but also on other peoples of Russia.

The process of denationalization, inevitable in the course of economy reformation,
appeared to be somewhat unclear for a significant part of the society, according to experts,
largely due to unjustifiably rapid and high concentration of capflaJ in the hands of individuals.

It not only deepened social inequity among certain groups of population but also
intensified struggle for spheres of influence among newborn businessmen, who, in their
majority, have criminal experience and tics with the criminal world.

Out of 2.5 million juridical persons accounted for by tax agencies 93% represent non-
state sector of the economy. Initially insufficiently regulated by the law il still remains open
for criminal structures, as the "purity" of the capital is not an essential condition in
privatization and joint-stock transactions.

The hopes of more than 3 million of our inexperienced compatriots driven largely by
the intention to protect their savings from inflation but not by greediness and venturous
interests, ai'c buried under the debris of numerous financial "pyramids".

157

'Tranfsparcnt" borders, insufficiently stringent registration control of ncwcoming
foreign citizens, permanent flow of refugees and forcibly displaced persons into Russia gave
an opportunity to the guests of our country to augment the number of criminals.

By the way, we sec all the danger of gaps in our legislation and work along with our
legislators on improving the legal basis.

The Parliament Currently has under consideration bills "On organized crime", "On
a)rruption", drafts of Criminal Code and Criminal Prosecution Code of the Russian
Federation, a series of principal amendments to other laws in effect relating to crime-fighting.

We expect to receive an extensively renewed modern legal basis for practical use by
the beginning of 1997.

Some figures which characterize the .state of criminal activity in Rus.sia.

During the last year the number of officially registered crimes was 2.756 thousand
which is a 4.7% increa.se comparing to 1994. 59% of them aic qualified by the criminal law
as grave offenses.

Two thirds of the officially registered crimes are of mercenary nature, the number of
thefts, armed robberies of citizens* homes, vehicle drivers, collectors, currency exchanges
significantly increased.

During the past year main efforts of the Russian law enforcement agencies were
focused on accomplishing tasks held by the Federal program on enhancing crime-fighting.

The number of solved crimes has increased. Persons responsible for.837 thousand
gi'ave offenses have been identified. In order to reimburse damage from illegal activity
forfeitures of illegally acquired properly and valuables totalled in 1.5 trillion roubles.

At the same time every forth crime, two thirds of armed robberies, most of the
conti-act murders remained unsolved.

During the last year a set of measures on suppressing activity of criminal group.s
engaged in drug-trafficking has been implemented.

The growth of drug-related crimes has been noted almost in all regions of Russia.
Compared to 1985 (i.e. during 10 ycai-s) they have increased by 4.8 times.

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Illegal prcxluclion of conlrollcd substances continues to develop.

The manufacture of drugs in underground laboratories haa become a significant factor
of their illegal production growth.

However a most dangerous tendency is currently a rapid enhancement of drug
smuggling to the Ruusian territory.

More than half of all confiscated controlled substances arc of foreign origin. Almost
all of such dangerous and expensive drugs as cocaine, opium, heroin, synthetic drugs quickly
filling the Russian market arc shipped from abroad by smuggling channels.

Only the cu,sloms agencies of the Russian Federation have made 764 apprehensions of
drug-traffickers (almost twice more than in 1994), which led to forfeiture of 6.5 tons of
narcotics.

The analysis of crimes relating to large shipments of drugs demonstrates that about
25% of persons responsible for them are citizens of the former republics of the USSR. They
bring into Russia up to 30% of illegally circulating narcotics. Most of the drug-traffickers are
citizens of Ukraine, Kazakhstan, Azerbaidzhan, Lithuania and Central Asian states.

There has been an increase in illegal shipments of drugs from the countries of "far
abroad". These primarily arc opium from Afghanistan, shipped through Tadjikistan,
Kyrgyzslan, Turkmenistan and Uzbekistan, cocaine from Columbia, Peru and the US, heroin
from the "Golden triangle" states and controlled medical substances from India. Transit of
drugs through Russia to the Western Euivpe^ecomc* increasingly active.

Aggregate estimation of development of the above tendencies allows to make a
conclusion that Russia has become a target of international drug-trafficking expansion, A(^
Russian criminal drug-trafficking groups.

Let me say a few words on the sfituation with illegal attempts to seize radioactive
materials.

Theft is one of the most dangerous type of crimes connected with illegal trafficking of
radioactive materials. 27 of such crimes were committed in 1993, 16 in 1994 and 5 in 1995.

159

As a rule, they were committed by the employees of ihc facilities where ihcfi of
radioactive materials took place. In 90% of these cases responsibly for such thefts were
common workers.

Circle of persons involved in further resale has been forming spontaneously during
search for the buyers. That accounts for the fact that there are no grounds for insisting on
existence of mafia-type organized criminal groups specializing in theft of radioactive
materials.

Analysis of the investigation documents demonstrates that the primary object of such
criminal attempts are the sources of ionizing radiation used in small quantities in various
industrial devices.

Some cases involved theft of technological materials with isotope composition based
on metal uranium-238 enriched to a different extent by uranium-235 or its derivatives.

The above radioactive materials can not be used in production of nuclear weapons due
to their physical characteristics.

It is essential to note that during 1994-95 we held several meetings with the
representatives of the US and German law enforcement agencies where we agieed on the
mechanism of joint uclivilies aimed at prevention of such crimes.

I would like to take a closer look at the issues of fighting organized crime in
Russia.

Contemporary organized crijnc is a new qualitative level of professional group crime.
This is reflected not only in a high level of professionalism and a developed network of
corruption links, but also by a broad scale of its activities and influence exerted on a
considerable number of branches of the national economy and power sUiictures.

During the last three years units of the Russian Ministry of Internal Affairs elicited
about 22 thousand organized crirainiil groups with different extent of cohesion, with more than
94 thousand members. Almost every sixth group was involved in inlcr-rcgional and
international activities, every tenth group had corruptive links with federal institutions.

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A violent struggle for the division of spheres and territories of influence was unleashed
among criminal clans. In 1995 alone this led to 183 armed clashes leaving 156 murdered and
104 wounded.

Despite the difficulty of the criminal situation, law enforcement agencies did not lose
control over the ongoing processes, and, moreover exercised their capabilities of resu-aining
them.

As a result of the undertaken measures criminal activities of 14 000 organized gn)ups
were stopped during the last three years. Charges were broughij*if against 41^500 thousand
leaders and participants.

The analysis of the available inrormation disclosed a stable tendency of the
increase of the number of Russian organized criminal groups engaged In illegal activities
abroad. .

According to the^operational estimations of the Russian Ministry of Internal Affairs,
approximately 2000 members of 1 10 Russian criminal groups commit crimes in 44 countiies
of the world. Out of this number approximately every fifth ciiminal group has established
links in Germany and every seventh - in the United States.

According to our data, about 20 organized criminal groups of Russian origin are
involved in illicit activities on the territory of the United States. Their main interests are
concentrated in New- York City, Los-Angeles and Miami and include primarily money
laundering, finance fraud, racketeering, drug-trafficking, etc. US citizens are becoming their
victims; a number of frauds committed in Russia were planed by the iramigi-ants from the
former Soviet Union on the US soil.

Today jointly with the FBI we investigate 56 cases which involve over 400 persons
suspected of links with the organized criminal groups, and neaily 140 companies and
organizations engaged in money-laundering and other illegal financial operations.

The investigations of the cases of the Ivankov's criminal group, the penetj'ation into
the computer network of the "Citibank", the group of international swindlers who claimed to

161

represent a US-bascd company "NEWTEL CO" are the mosl vivid and well-known
illustrations of our interaction.

I would like to conclude with the following.

The criminals unite and pose a real threat to the entire world community.

Meanwhile, international legal measures of extradition of criminals, and restitution of
properly or reimbursed money acquired by means of illegal activities are insufficient.

Nowadays the Russian Federation makes ct)n8iderablc cfforus to establish an
appropriate international legal basis for a)opcration between the Russian law enforcement
institutions with foreign partners.

It is a fact that the intention to sign a broad-scale US-Russian treaty on mutual legal
assistance as soon as possible is stated in the joint statement by the President Clinton and
President Yeltsin on cooperation in the field of law enforcement and crime fighting of
September 28, 1994 and in the intergovernmental agreement of 1995.

It is desirable that these intentions would be promptly fulfilled.

Thank you for your attention.

162

STATEMENT OF
MICHAEL FRANZESE

Good morning distinguished members of the Subcommittee.

My name is Michael Franzese and I have been subpoenaed here today to
address the Subcommittee regarding my personal experiences with Russian
organized crime in the United States. In order to understand the extent of that
criminal activity, the Subcommittee needs to be aware of my own background and
former involvement in organized crime.

I was bom in Brooklyn, New York. My father is John "Sonny" Franzese,
former underboss of the Colombo Crime Family, one of New York's five La Cosa
Nostra families. In 1975, 1 became a "made" member of the Colombo Family in a
formal induction ceremony presided over by then-Family Boss, Thomas DiBella. I
acted in the capacity of "Soldier" from 1975 through 1980, when I was appointed a

163

"Caporegime" and given a crew of soldiers to preside over.

During the years I was a member, I engaged in criminal activity on my own
behalf as well as that of the Colombo Family. Such criminal activity included: tax
fraud, loan sharking, gambling, securities fraud, labor racketeering, and extortion.

In 1985, 1 was indicted in the Eastern District of New York for various
racketeering charges. In 1986, as part of a plea agreement with the Organized
Crime Strike Force of the Department of Justice, I pled guilty to two counts of the
28 count indictment relating to tax fraud. I accepted a ten-year prison sentence and
fifteen million dollars in fines and restitution.

In or about 1987, while in federal prison in California, I decided to sever my
twelve-year relationship with the Colombo Crime Family and organized crime in
general. As I address the Subcommittee here today, I am no longer a member of
organized crime.

In early 1980, while I was a Colombo family soldier, Lawrence lorizzo, a
major independent gasoline wholesaler based in Long Island, New York, came to

164

me for protection. lorizzo and Russian organized crime figures, working
independently of one another, each figured out how to orchestrate one of the most
lucrative government rip-offs of all time — stealing gas tax money. As you have
been told by previous witnesses, this was a complex scam that, over the years, has
netted Italian and Russian organized crime hundreds and hundreds of millions of
dollars. And the Russians pioneered and perfected these schemes to where, I
understand, it is still going on today, despite changes in the law.

I first got involved because some mob figures were trying to shake down
lorizzo. lorizzo owned or operated some 300 independent gas stations throughout
Long Island at that time. It was a cash-heavy operation. I resolved lorizzo 's
problem by sending some of my guys over to let these other mob figures know
lorizzo was with me. That ended lorizzo's problem. In return, I became his
partner in the wholesale gasoline business.

Later in 1980, 1 began working with Russians in the gas tax business. One
of my soldiers, a guy named "Vinnie," had been approached by the Russians to
help collect a $70,000 debt. Vinnie's job was to say, "Pay the money or I'll break
your legs" and to sound convincing, which he was. My guy came to me with the

165

Russian's offer to see if I was interested. I was and so I arranged a meeting with
the leaders of this Russian organized crime group: Michael Markowitz, David
Bogatin, and Lev Persits. These guys owned and operated a wholesale gasoline
company in Brooklyn, New York.

These Russians were having problems collecting money owed them. There
were also having problems in getting and holding onto the licenses they needed to
keep the gas tax scam going. I could help them on both counts. First, the Colombo
family's reputation was very effective in causing people to pay their debts. Also,
our family had a guy at the Commissioner of Revenue's office at the state house in
Albany who could get the necessary licenses.

The Russians were eager to align themselves with someone who could
resolve both problems. Because of my association with organized crime, they
believed me to be that person. As it turned out, I was.

We arranged a sit-down on a Satxirday morning, in the fall of 1980, at a
Mobil station they owned in Brooklyn. The three Russians told me how they were
stealing tax money due the government on the sale of gasoline and how they often

166

ran into problems collecting some of the illegal proceeds from their customers.

We cut a deal whereby they agreed to become part of my organization. I
would provide them with protection from the other mob families and the muscle to
collect all the money due them. Through the services of Lawrence lorizzo and oixr
gasoline operation they would have access to the wholesale licenses they needed to
defraud the state, county, and federal government out of tax revenue. We agreed to
share the illegal proceeds: 75% my end - 25% their end. The deal was put on
record with all five crime families and I took care of the Colombo family share of
the illegal proceeds out of my end.

Over the next four and a half years, the combined Russian/Iorizzo
organization, which I controlled, defrauded the United States government and the
states and counties of New York, Connecticut, New Jersey, Pennsylvania, and
Florida out of hundreds of millions of tax dollars due on the sale of gasoline.

167

and, at one point, we were doing 400-500 million gallons per month. I'll leave it to
you to do the math.

During that time, I became very closely involved with the Russian group. I
found them to be intelligent, possessing remarkable business instincts that they
would not hesitate to use for illegal gain. As a result of their experiences living in
Communist Russia, they have little respect for United States law and little fear of
American prisons.

They would frequently approach me with other illegal business ventures and
were eager to share in illegal deals I would propose to them (loan sharking,
insurance fraud, securities fraud). One of the business ventures we jointly entered
• into was buying a bank in Austria. The purpose was to be able to use this bank to
finance other organized crime ventures. I invested $10 million from Colombo
family gas tax profits in this bank. Including the money invested by the Russians,
the bank had a total of $80-100 million in assets. Bogatin later went to Austria,
where he played an active role in operating this bank. Also, lorizzo created a
"slush fund" from gas tax money, which he kept in this Austrian bank. That
account amounted to $1 5 million when the Government seized it after lorizzo's

168

arrest.

I found the Russians to be a group that wanted to flex their muscles and
would not hesitate to resort to violence when they felt it necessary to do so. They
enjoyed the relationship with both myself and the Colombo family because it gave
them power and recognition as a group to be reckoned with.

I did not find the Russian criminals to be a very structured group in
comparison to the Italian La Cosa Nostra. They were very "clannish," however,
and the most financially successfial Russian was looked up to by his comrades as
their leader or boss. The boss was given a lot of courtesy and respect and, in
return, provided the members of his group with opportunities to work for him and
make money.

Michael Markowitz, David Bogatin, and Lev Persits were all in a position of
leadership and had about 200 other Russians working under them in various
capacities. They were also continuously assisting other Russians in immigrating to
the United States.

169

After I went to prison in 1985, my information was that Markowitz, Bogatin
and Persits did continue to worlc with the Colombo family in the gasoline business
for a short period of time.

Around 1988, Markowitz was shot and killed in front of his home in
Brooklyn. I do not know who was responsible for his death, however, I am
reasonably certain that the hit was authorized by the Colombo family and could
possibly have been carried out by other Russians.

An attempt was also made on the life of Lev Persits. Although he survived
the attempt, he is permanently disabled and confined to a wheelchair.

David Bogatin fled to Austria where he had a controlling intetest in the bank
that was funded with gasoline tax money from our operation. He was captured in
Poland, extradited to the United States to face tax fraud charges and is currently
serving a federal prison sentence.

I have provided the Subcommittee with a basic overview of my personal
experiences with Russian immigrants engaging in criminal activities during the
1980's. I hope this information is helpful. I would be happy to answer any
questions the Subcommittee might have. Thank you.

170

STATEMENT OF ANTHONY CASSO

Good afternoon, Mr. Chairman and members of the Subcommittee. My name is Anthony
Casso. Early in my life, I was given the nickname "Gaspipe."

I have been in jail since 1993, when I was arrested after being a fiigitive for almost three
years. At that time, I was the underboss of the Lucchese organized crime family. Ultimately, I
decided to cooperate rather than go to trial. As part of my deal with the Government, I pleaded
guilty to a 72 count indictment, including murder, racketeering and extortion. I have not yet
been sentenced, and no promises have been made to me for my testimony here today.

As part of my cooperation agreement, I told the Government about my life of crime. I
gave a deposition for use in an Israeli trial, but I have not yet testified at a trial in the United
States. I will testify, if requested by the Government, at upcoming organized crime trials.

I have been involved with organized crime for more than 35 years, since I was a kid
working on the docks in Brooklyn, New York. When I was 21,1 became associated with a guy
named Chris Fumari of the Lucchese organized crime family. Everybody knows him as "Christy
Tick."

Before I was arrested this time, I had only been in jail once. That was in 1962 for five
days when 1 was convicted of rtinning a bookmaking operation on the docks and fined $50.
After that, I was arrested several times for different Federal and state charges, including assault
with a gun, selling stolen property, dealing heroin, burglarizing a bank, and bribing state parole
officers. In every case, I was either acquitted or the charges were dropped.

In the early 1970s, I met Vic Amuso. Then, in 1974, 1 became a "made" member of the
Lucchese family. Vic was made in around 1977. At that time, "Tony Ducks" Corallo was the
boss of our family. But, in 1986, Tony Ducks went to jail so he had to name a new boss. I
became a "capo" in 1986. After discussions within the family, Tony Ducks made Vic Amuso the
boss at the end of 1986. At the end of 1987, Vic told me 1 was the new consiglieri. Then, in
1989, Vic named me the underboss of the family. After Vic was arrested in July 1991, 1 ran the
Lucchese family as underboss while I was a fiigitive.

In my position as a member of the Lucchese Family, I came to know individuals
associated with Russian organized crime, which is the subject 1 have been asked to testify about
today.

In the mid-1980s, our family got involved with Russian organized crime in the gasoline
business in Brooklyn. Italian and Russian organized crime made large amounts of money by
working scams to avoid paying taxes on gasoline. The Russians owned hundreds of gas stations
and controlled the supply and distribution of gasoline. We provided them with protection they
needed to maintain a cartel. We also helped them set up corporations to work the scam.

171

The main Russian guy working with our family was Marat Balagula. Marat was one of
the early leaders of Russian organized crime in Brooklyn. He made millions off the gas tax
business and our family made a lot of money with him.

In aroimd late 1 986, another Russian named Vladimir, whose last name I did not know at
the time, came up to Marat in a Russian restaurant in Brighton Beach. Vladimir had recently
arrived in Brighton Beach from Russia. According to the Russians, the word on the street was
that he was a tough guy with his own crew. Marat told me Vladimir pulled a gun, put it next to
Marat's head, told Marat that he was his new partner, and demanded Marat pay him $600,000 or
Marat would be dead.

Marat reached out to us and told us what happened. We agreed to meet the next day.
When we went to Marat's house, we found out that he was so scared that he had a heart attack
but did not want to go to the hospital. I remember seeing Marat in bed hooked up to all kinds of
machines, refusing his doctor's orders to go to the hospital. Marat's guy wanted us to kill
Vladimir.

Since Marat was with our family and especially since he was such a money-maker for us,
this was not just a threat against Marat. This was a threat against the Lucchese family as well.
We knew what we had to do. Vic and I agreed that Vladimir had to be killed. We took this
situation to Christy Tick, who agreed we could have Vladimir killed. Vic gave the hit to Joey
Testa.

We asked Marat and one of his guys to get us some information to identify Vladimir.
One of Marat's guys got us his picture and license plate number. We had Marat call Vladimir
and arrange to have lunch with him at the same Russian restaurant in Brighton Beach where
Marat was threatened. After leaving the restaurant, Vladimir was shot and killed.

I heard about the murder on the radio. Marat was very thankful that we had gotten rid of
his problem. We couldn't let somebody try to put the squeeze on one of our family's big money
makers. After that, Marat did not have any more problems from any other Russians.

I found the Russian organized crime groups to be very clever. We knew the Russians
were involved in heroin trafficking, as well as complicated scams involving forgery, and tax
evasion in the oil and gas business. The Russians were also willing to use violence to achieve
their goals.

I will be happy to answer any questions you have about my knowledge of Russian
organized crime.

172
STATEMENT OF ANONYMOUS RUSSIAN CRIMINAL

Chairman Roth, members of the Subcommittee, good afternoon.

I have been asked to testify today about Russian organized crime in the
United States, a problem which exists in several cities and is likely to grow. Let
me explain the two reasons why I am able to speak on this subject. First, I grew up
in Russia with people who are now leaders of criminal groups worldwide,
including here in the United States. My father was a high-ranking officer in the
Soviet military, and so, as a boy, I attended the best schools and socialized with
the communist party elite. My classmates included many future politicians and
criminal leaders.

Second, since 1992 I have lived in the United States and know many of the
Russian criminals who have settled here. Some of these men -- such as Leonid
Zuza and Vyacheslav Kirillovich Ivankov, or, "Yaponchik" — might be familiar to
you. They are to me. What you have to understand is that the well-to-do Russian
community in this countr> is rather small, and that the successftil Russian criminals
arepart of it.

173

Through my business and social contacts, I was a part of this community.
But I have been in prison for the past year. I am serving a sentence for the
possession of a firearm, which violated the terms of my probation agreement. I am
testifying behind this screen today because I believe that, if my identity were
known, I or my family might be killed.

To understand Russian organized crime in this country, you must first
appreciate the situation in Russia. For the two years prior to my arrival in the
United States, I set up and ran the Moscow branch of an American corporation
specializing in investments and international trade. We had a beautiful office three
minutes fi-om Red Square. Now there are two things you must do to operate a
business successfully in Moscow. First, you must pay the right government
officials under the table. Because I had knovm officials in Moscow since I was a
child, figuring out whom to pay was simple. To set up our office so close to Red
Square, I had to pay money to the chief of government property in Moscow. Later,
when we wanted to open a supermarket in Moscow, I paid cash to the mayor of
Moscow, Yuri Luzhkov.

The second thing you must do to run a successful business is purchase a

174

krisha, literally "roof in Russian, which has come to mean protection. The more
important you are, the higher the roof must be. In Moscow, organized crime
provides the roof. Back in 1990, 1 could pay one organized crime group say, ten to
twenty percent of our profits, and it would make sure I didn't have trouble with
any other groups. There was crime, but at least it was orderly. Leaders of the
major organized crime groups in Moscow would meet regularly to divide up
opportunities. But as time went on, things got out of control. Fighting broke out
among the organized crime groups in Moscow and several of the leaders were
assassinated. Otari Kvantrishvili, at that time the most powerful organized crime
figure in Moscow and a friend of mine, was the first to be killed. Several others
followed. Most of these men were vory v zakone, a title reserved for powerful
Russian godfathers.

As I said, things got out of control. I didn't know which roofs to pay and
which were safe to ignore. Men were showing up regularly and demanding
protection money. I came to the United States to escape this turmoil. And I can
tell you, many criminals have as well. Some are thugs who worked as enforcers or
muscle in criminal groups based in Russia. These men are responsible for much of
the violence that has taken place in Brighton Beach and other communities where

175

Russians are concentrated in this country. These men are also disorganized and
looking for a leader to devise a profitable criminal venture; someone like Ivankov.
These are dangerous men, but would be far more so behind a clever leader.

There is a difference between the Russian criminal who immigrates to the
United States today and the one who came in the 1970s and 80s. Fifteen years ago,
Russian immigrant criminals were, on the whole, smarter than today's lot. The
schemes they executed — Balagula's fuel tax evasion, the medical insurance fraud
of the Smushkevich brothers - made them millionaires. As I said before, most of
the current wave of Russian criminals is more prone to violence, but less
resourceful than their predecessors. Whether or not they left Russia with money ~
they will run out. And they will be looking for ways to make more.

Russian organized crime in this country includes criminals from both
immigrant waves. They are involved in a number of illegal activities, many of
which I understand you have heard about earlier today. These range from money
laundering to extortion to car theft to drug smuggling to insurance and gas tax
fraud to murder. Some of these crimes I know about specifically.

176

For example, I know of Russian criminals in this country who ship guns and
cocaine back to Russia. These men have beautiful offices in Rockefeller Center
and Beverly Hills and look like legitimate businessmen. They run import-export
busmesses funded by the mafia over in Moscow. Much of what they trade in is
legal, but much is also illegal. For instance, they purchase cocaine in the United
States for twenty to thirty dollars a gram and sell it in Moscow for one hundred to
one-hundred fifty dollars. In Moscow, cocaine is a habit of the very rich, which
means only three types of people can afford it: newly-rich businessmen and
politicians; prostitutes; and criminals.

I know of murders, as well. I knew Oleg Koratayev, the famous Russian
boxer who was shot and killed in Brighton Beach outside the Arbat restaurant. I
know also that, in the summer of 1994, Leonid Zuza ordered the murder of another
ex-boxer named "Dmitry" because he refused to pay Zuza $17,000 he owed him.
The killer, a Russian named "Vladimir" who worked for Zuza, shot Dmitry on a
patio outside a cafe on Melrose Avenue in Los Angeles.

I also know about extortion, which Russian criminals practice all over the
world, mainly on fellow Russians. I myself was approached by a group of Russian

177

criminals. They showed me pictures of my family. They did not have to tell me
why. What they meant was, if I did not pay them money, my family would be
harmed or killed. They demanded tens of thousands of dollars. The leader of the
group came to my house one night to collect this money from me, but I had a
shotgun and he chose to leave.

Professional hockey players from the former Soviet Union are also victims
of extortion. And the extortion does not just happen in Moscow or Kiev, it
happens here. Alexander Mogilny, who plays for the Vancouver Canucks, was
threatened by Sergei Fomichev, a man I know. Fomichev had helped Mogilny
come to this country. A couple of years ago Fomichev came to Mogilny,
threatened him and demanded money. Mogilny was scared and went to the police
who caught Fomichev before anything happened. Fomichev has ties to Russian
organized crime groups.

Often, when a Russian criminal demands money the threat is not explicit.
But it is clearly understood. Alexei Zhitnick, a defenseman for the Buffalo Sabres,
used to play for the Los Angeles Kings. He showed up at a Russian club in Los

Angeles one night with a new car, expensive clothes and beautiftil women. He was

178

young and naive. A man named Sasha, whom I know is connected with a Russian
criminal group, approached Alexei and demanded money from him. Sasha was
sending Alexei a warning, to make sure he thought about his future in Los Angeles.
Alexei did not go to the police. Instead he went to a more powerful criminal group
to take care of the problem for him, which I understand it did.

I also know Vladimir Malakhov, who plays for the Montreal Canadiens but
used to be with the New York Islanders. He was approached in the National
restaurant in Brighton Beach by a man who worked for Ivankov. The man
demanded money from Malakhov. He didn't have to threaten him explicitly; the
message was clearly understood. Malakhov spent the next months in fear, looking
over his shoulder to see if he was being followed, avoiding restaurants and clubs
where Russian criminals hang out. Fortunately, the problem went away when
Malakhov was traded to Montreal.

These are just a few stories to illustrate the illegal activities of Russian
organized crime in the United States. What we have here cannot compare to the
criminal activity and structure in Russia. But what we have here is a problem that
is growing. Just last week I heard that another vor>' v zakone, or Russian
godfather, recently arrived in the United States. As I said, when leaders arrive the
problems will multiply.

I am happy to answer your questions.

179

Testimony of Detectives Daniel Mackey and Ralph Cefareilo before the

Permanent Subcommittee on investigations

May 15, 1996

Good morning. Chairman Roth, Senator Nunn and members of the
Permanent Subcommittee on Investigations. My name is Detective Daniel
Mackey of the New York City Police Department. On behalf of myself and
my colleague, Detective Ralph Cefareilo, thank you for this opportunity to
testify about Russian/Eurasian criminals operating in New York City and
what is being done to stop them.

Previous speakers have given you international and national perspectives.
Our view of this most serious crime problem is that of working detectives,
catching cases involving suspects and, quite often, victims who were born
in the former Soviet Union.

I work in a precinct detective squad that covers Brighton Beach, Brooklyn.
Since the late 1970s, Brighton has become home to an ever-growing
number of Russian-speaking immigrants from a variety of former Soviet
Republics, including Georgia, Azerbaijan and Chechen. The great majority
are hard working, law-abiding citizens who have revitalized a neighborhood
that has come to be known as "Littie Odessa." Brighton Beach Avenue is
lined with thriving markets, restaurants, nightclubs, clothing and video
stores that all cater to Russian-speaking customers. It is possible to go
about your daily business in Brighton without uttering or reading one word
of English.

Unfortunately, Brighton is also a hub for Russian-born criminals with a
well-deserved reputation for extreme violence. Their criminal activities
include vicious murders and assaults, extortion of Russian-owned
businesses, prostitution, illegal gambling and a vast collection of frauds
and schemes that ravage the economy, costing government, businesses
and consumers millions.

We have encountered staged motor vehicle accidents in which all
participants claim back and neck injuries, then file insurance claims for
medical services provided by Russian-operated medical groups also
believed to be in on the scam. We have, in joint operations v^th the United
States Secret Service, dismantied sizable cellular phone-cloning networks
run by Russian/Eurasian nationals.

180

While we have had some success, it is often difficult and, frankly, quite
frustrating, to investigate these illegal activities — for the same reasons it
has always been difficult and frustrating to investigate crimes committed
within a close-knit immigrant community. To a large extent, the criminals
count on language as a barrier, as well as a presumed reluctance on the
part of fellow immigrants to cooperate with police — especially if the police
in their homeland were viewed as agents of an oppressive regime.

The NYPD has relatively few police officers and investigators who are
fluent in Russian. The language barrier may hinder an investigation in
several ways: the first officers or detectives to arrive at a crime scene may
have to scramble for translators. And, ifs tougher to field traditional
undercover operations used in public morals cases.

For example, Russian-run brothels are extremely lucrative, but do not
cater to non-Russian clients. We have attempted to use undercover
"Johns" who do speak Russian, but even they require an introduction
from a credible go-between, which has proven difficult to obtain.

We have investigated numerous cases involving the extortion of Russian-
owned businesses, sometimes referred to as "window insurance." It is not
uncommon for complainants in these cases to cooperate only up until the
time an arrest is made, then refuse to follow through on the prosecution.

When the crime is murder, witnesses willing to cooperate are also scarce.
At this time, I'd like to introduce Detective Cefarello, who will provide a
brief overview of our experience with murder investigations of Russian
crime figures.

Good morning. My name is Detective Ralph Cefarello. I am currentiy
assigned to a new citywide investigative unit specifically created to
combat the criminal activity you are hearing about today.

In the past 15 years, there have been a total of 42 murders and 24
attempted murders in New York City knov«m to be linked to
Russian/Eurasian criminal organizations. Many of the murder victims
served time in prison in the former Soviet Union or were known to engage
in criminal activity there; several were accomplished athletes in contact
sports such as vt^estiing, boxing, or one of the martial arts. Commonly, the
motives for these murders involved disputes over profits from illegal
activities and turf battles over extortion rights.

Witnesses in these cases were often less than forthcoming. Take, for
example, the murder in Brooklyn of a former Soviet heavyweight champion.
This individual, who was involved in strong-arm extortions and narcotics

181

trafficking, was shot and killed in front of a Russian nightclub on Brighton
Beach Avenue. He had been among some 75 guests at a private party. His
killer had also been present during the festivities. We talked to everyone
who had been present at the party. The story was the same, interview after
interview. No one saw or heard anything. No one could identify the victim.
No one could identify his killer.

Despite, these types of investigative obstacles we've been able to clear 15
of these 42 homicides and we expect to prosecute those responsible for
numerous other murders pursuant to active RICO investigations with
federal prosecutors.

It is important to note that cooperation among local, state and federal law
enforcement agencies remains an essential ingredient of any successful
strategy to address this problem. NYPD detectives meet regularly with
representatives of other agencies; these information-sharing sessions
have proven quite productive.

Finally, thank you for your interest in a crime problem we are working so
hard to eradicate. We already enjoy the leadership and support of Mayor
Rudolph W. Giuliani and Police Commissioner Howard Safir. Any additional
federal resources you could send our way would be greatly appreciated
and well used to permanently stunt the growth of Russian organized
criminal activity on our shores.

25-049 0-96-7

182

WRITTEN STATEMENT OF DETECTFVE BILL POLLARD

KAJi C U TIVS STTMMARY

The demise of the Soviet empire and the opening of the borders to
the West have kindled new incentives and opportunities for
organized crime in the newly independent states of the Former
Soviet union (FSU) . The explosive growth of organized crime in
the FSU represents a significant threat to the United States.
These syndicates are playing an increasing role in the global
trafficking in illicit drugs and are exporting their operations
and networks and collaborating with foreign criminal
organizations. These developments pose a serious challenge to
law enforcement agencies within the United States.

As Russian crime syndicates move westward and collaborate with
foreign criminal syndicates, the predictable results occur --
increases in homicides, racketeering, major frauds, extortion and
kidnappings. These crimes are occurring all too frequently
within the Russian/Armenian ethnic communities.

The greater Los Angeles area is particularly impacted by the
activities of Russian criminal organizations. This area has the
second largest Russian population outside of Russia.

Not surprisingly, law enforcement's efforts to investigate these
crimes are hampered by: a mistrust of the police within the
Russian/Armenian community; an insufficient number of qualified
interpreters; and fear of reprisal if information is provided to
the police.

183

To better understand the magnitude of the problem of Russian
orgamized crime (ROC) in 1996, it is necessary to understand the
recent migration of criminals from the countries of the former
Soviet Union (FSU) . During the 1970's and 1980's, the FSO
allowed only about 200,000 Soviet citizens to migrate to the
United States. The majority were Russian- Jewish refugees.
However, it is well recognized that the FSU used this opportunity
to "encourage" migration of hardcore criminals. It is believed
that many KGB agents also were part of the migration from the
FSU. The emigre population settled primarily in the New York
Brighton Beach area and secondarily in the Los Angeles sorea of
California.

Between the 1989 Lautenberg Amendment and the mid-1990' s (five
years) , immigration from the FSU has far surpassed the total of
those immigrating the previous 20 years. A small percentage of
those emigres have continued to be criminals who enter with false
passports and fraudulent visas .

The Los Angeles Police Department began to identify and track a
few associated criminal members of the FSU community in the early
1980 's as preparations were being made to host the 1984 Olympic
Games. Since the Olympics, the number of targeted ROC criminals
has steadily increased. These groups have become increasingly
violent in the pursuit of illicit gain.

184

While these groups predominately prey on those within their own
ethnic community, their criminal enterprises have increasingly
become more complex. Medical fraud and gas excise tax fraud are
two areas that have been targeted by these criminal syndicates.
These frauds are difficult to investigate and difficult to
prosecute. Local law enforcement agencies lack the resources to
properly investigate these crimes, yet these schemes cost the tax
payer millions of dollars in lost revenue or in excess ins\irance
premiums.

Law enforcement in the Los Angeles area has responded to the
threat of Russian organized crime by exchanging investigative
leads and general information in order to track their criminal
p\irsuits. In 1991, detectives from the Los Angeles Police
Department's Organized Crime Intelligence Division and the
Los Angeles County Sheriff's Department organized a regional
meeting of law enforcement professionals. The group of
investigators became known as the Soviet Organized Crime
Intelligence Team (SOCIT) . The Southern California group, which
meets monthly, has grown to include investigators state -wide, as
well as federal law enforcement agents.

There are many obstacles facing law enforcement as they battle
ROC. Communication links need to be improved within the state
and national boundaries. Improved cooperation and communications
between the United States and other victim countries should be
actively explored. The problem is not solely a United States/FSU
issue. Russian organized crime syndicates have increased
alarmingly in the past five years. Their influence extends
throughout Europe and North America. We are all becoming victims
amd we must work together. Unfortunately, responsibility for
many of these issues is currently fragmented among different
federal offices and bureaus. The United States will need to
redefine its organizational responses to cope with the complex
challenge arising from FSU crime groups.

185

IKTROPnCTIOK

This document was prepared by the Los Angeles Police Depau-tment ' 3
Organized Crime Incelligence Division to be presented in
conjunction with testimony before the United States Senate
Perroanent Subcoramittee on Investigations, Coiranittee on
Governmental Affairs, chaired by Senator William V. Roth, Jr.
The purpose of this paper is to discuss the impact of Russiam
organized crime (ROC) on the Los Angeles, California, area and to
provide specific examples of ROC criminal activity. It is
important to include a limited history in order to better
understand the development and continued growth of Russian
organized crime syndicates which are of particular concern to the
Los Angeles Police Department as well as other California law
enforcement agencies.

HISTORY

The term Russian organized crime will be used to describe the
various criminal groups whose members come from and/or have ties
to Che former Soviet Union (FSU) . These republics include more
than 150 ethnic backgrounds where approximately 120 languages and
dialects are spoken with the Russian language being a common tie.

During the 1970 's and 1980 's, the FSU relaxed its immigration
policy, allowing approximately 200,000 Soviet citizens to
immigrate to the U.iited states. The majority of these emigres
were Russian- Jewish refugees. However, it is widely believed

186

that these emigres included some 2,000 professional criminals who
had been released from FSU prisons. It is further believed that
a number of former KGB agents also emigrated to the Onited
States.

The Iciryest concentration of these emigres settled in the '
Brighton Beach area of New York with the next highest
concentration settling in the Los Angeles area of California.

In 1989, the Lautenberg Amendment was enacted which allowed up to
50,000 PSU emigres to enter the United States each year. This
was followed by the Russian Parliament allowing its citizens Co
immigrate and travel freely. In 1991, the United States
experienced a surge of emigres nearly equaling the period of 1981
throughout 1989. These emigres continued to primarily settle in
New York followed by California.

In addition to the legal emigres, many others entered the
United States on Non-Immigrant Visas and forged documents. Many
emigres also misused the L-1 Visa for business or alleged
business purposes to gain entry. Investigations revealed that
shell businesses and, many times, businesses which were
manipulated or charging significant fees, sent letters to the
United States Embassy sponsoring individuals and requesting visas
be issued. As the number of FSU emigres increased, so did the
ROC problem.

187

The early development of ROC in the United States can be compared
to that of the Italian La Cosa Nostra (LCN) . Aa the Soviet
emigres settled in concentrated areas due to family, ethnic and
economic ties, the criminal elements preyed on their own.
Typical crimes included extortion, theft, fraud and prostitution
As the crime groups grew, so did the sophistication of their
crimes .

In the early 1980' s, while conducting threat assessments for the
upcoming 1984 Olympics, the Los Angeles Police Department began
to investigate the presence of ROC. The majority of ROC groups
in Los Angeles were generally considered to be loosely structured
criminal networks often with extensive ties to other groups
throughout the United States and the PSU. No complex structure
was identified in Los Angeles, Intelligence information did
indicate that prior to the murder of Evsei Agron, the East Coast
godfather of the Odessa Mafia, in 198 5, he had made several trips
to Los Angeles to expand his influence. It is believed that he
appointed a Los Angeles "Godfather" to resolve disputes among
rival ROC groups .

By 1985, the Los Angeles Police Department ' had identified 53
known Soviet emigre crime group members living in the Los Angeles
area and another 14 who visited and had ties to the area. These
criminals were involved in murder, extortion, espionage, grand
theft, counterfeiting, insurance fraud, medical fraud, arson,
robberies, burglaries, receiving stolen property, tax fraud.

- 3 -

188

business takeovers, loan sharking, rape, assault wich a deadly
weapon, and money laundering.

The number of criminals connected with ROC has skyrocketed since
the 1980' s. The ROC groups being seen in Los Angeles today are
more organized and have a broader spectrum of criminal activity
than their predecessors. Investigations reveal that these crime
groups are now involved in narcotic trafficking, indentured
servitude aind much more sophisticated financial crimes, medical
amd fuel tax fraud being the most common. The "Russian" criminal
today may come from Russian, Ukraine, Bela-Russia, or any one of
many other Commonwealth states. He has forged ties with crime
groups from most ethnic backgrounds. These groups include
Israeli, Hungarian, and the traditional Italian mafias.

RESPONSE TO THE THREAT

Law enforcement in the Los Angeles area is well aware of the
serious threat posed by Russian/Armenian organized crime (ROC) .
Regionally, detectives from local, state and federal agencies
have been responding for some time by exchanging investigative
leads and general information on these criminals. In 1991,
detectives from the Los Angeles Police Department's Organized
Crime Intelligence Division (OCID) , the Los Angeles Office of the
Federal Bureau of Investigation, and the Los Angeles County
Sheriff's Department, organized a regional meeting of law
enforcement professionals. This group became known as Soviet
Organized Crime Intelligence Team (SOCIT) . The group began

189

meeting on a monthly basis and drew interested detectives from
local, state and federal agencies. The California Department of
Justice, Bureau of Investigation, has assigned an analyst to
track ROC groups throughout California. Periodic intelligence
bulletins enable all California law enforcement to keep track of
the growing menace .

8BLECTBD CASES PtVOLVTNG ROC

In 1983 , Gersh Rachmeliuk and Yef im Sotsky, Russian organized
crime loan sharks in Los Angeles, loaned $50,000 to a Russian
victim at a 30% interest rate. Eight years later (1991) the
victim had repaid $480,000 and still owed over $120,000. When
the suspects began threatening the victim and his family for
repayment of the loan, the victim contacted the Los Angeles
Police Department. The two suspects were arrested and
subsequently convicted.

Medical insurance fraud is a billion dollar business for Russian
organized crime. Ic involves an array of frauds ranging from
staged auto accidents to false billing of insxiremce companies.
In 1991, one of the largest of such cases was brought to a
successful conclusion by federal, state and local agencies in
Los Angeles. Two Russian emigre brothers, Michael and
David Smushkevich, were responsible for a massive fraud scheme in
which they used mobil medical laboratories to conduct unnecessary
ouid often fraudulent medical tests on patients. Inflated or
fictitious bills were sent to insurance companies resulting in

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huge illegal fees being collected by the brothers. This fraud
eventually spread to Illinois, Missouri and Florida. Authorities
estimate the brothers reaped between $50 and $80 million in
profits.

In 1992, Los Angeles County Sheriff's Office deputies responded
to a citizen's call concerning a car left running in a private
driveway. When the deputies knocked on the door of the house in
question, they were met by Sergi Ivanov, a Russicin immigrant who
was covered in blood, upon checking the house for the source of
the blood, they found two other Russian immigrants, Andrey
Keznetsov and Vladimir Litvinenko, murdered, execution-style.
They also found a second Russian suspect, Alexander Nokolaev,
pretending to be dead. The suspects were in the process of
severing the tips of the victims' fingers in an effort to mask
the identities of the victims. The suspects had also "gutted"
the victims to recover the bullets which could be used against
them as evidence.

When questioned, the suspects admitted to the murders but claimed
they were victims themselves. They explained that the business
of the two murder victims was to import Russian immigrants
illegally and have them commit frauds with checks and credit
cards. The two victims, according to Nikolaev and Ivanov,
planned to hold their passports until sufficient merchandise was
accumulated through the frauds to repay the cost of their illegal
immigration. The arrestees became tired of working for the
deceased and committed the murder.

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191

In 1994, Akop Bagdasaryan, Secrak Nalbandi^m, Araen Oganeayam
Karen Oganesyan and Aram Tsaturyan, members of an Armenian
organized crime group, were convicted of kidnap/extortion in
Los Angeles. They vere convicted of kidnapping victims within
their own Armenian commxmity and threatening to ham them and
their families unless money was paid. It is believed this group
terrorized the Armenian community for 13 years.

According to the California Department of Justice, fuel tax fraud
is probably the most lucrative criminal activity in the State.
It is estimated that the State of California is losing revenue
from excise fuel tax at the rate of a million dollars a day.
Half of the money lost is attributed to Russian organized crime
groups operating primarily in the Los Angeles area. These groups
are able to "pocket" up to 40 .cents on the dollar from the tax
owed to the state and federal governments.

These schemes are accomplished by setting up shell companies and
using fraudulent IRS forms. These groups also rig fuel pumps,
extend fuel by blending additives such as transmix or alcohol and
sell lower grade fuel as premium.

A federal, state and local task force recently eliminated a major
fuel fraud ring by arresting 25 individuals for various RICO
violations. The ringleader was identified as the "godfather" of
the Armenian Mafia in Los Angeles. The estimated value of
criminal proceeds seized during this investigation was over 16
million dollars.

192

This group sold fuel below the level o£ legitimace retailers
forcing others out of business or requiring them to join their
■scam" in order to survive. Laws have recently been enacted in
California to collect the gas tax at the terminal level in an
effort CO close this loophole. The law appears to be making am
impact, however, it is suspected that the groups are moving out-
of-state to get their fuel.

OBSTACLES PACjIiyG LAW BNFORCEMgNT

Russian organi2ed crime presents law enforcement with the
formidable task of controlling its rapid expansion and
proliferation. There are many innate difficulties in the
invee.tigation of orgauiized crime and, more specifically, ROC.
Within the Russian community there is a significemt and solidly
based fear of organized crime. Yet, from their experiences in
the "old country, " the community has become accustomed to dealing
with the "shadow economy." Living in relatively small ethnic
communities, residents have no place to hide. Threats from
street thugs claiming connection to well-known "mafia" members
are taken seriously. Commonly, threats are made against elderly
relatives in the "old country, " effectively eliminating any
thoughts of fleeing or turning to the police for help. Having no
control of matters in the "old country," local immigrants feel
helpless.

Law enforcement must work to lift this veil of fear-induced
silence. But, to be effective, law enforcement must also address

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193

the distrust of authority, which is rooted in their experiences
in the FSU. Without doing so, it will become increasingly
difficult to identify amd target predators who are active in
their neighborhoods.

Once identified, ROC targets often frustrate law enforcement's
efforts by their transient nature. All too frequently, when law
enforcement begins to focus on a crime group, the hierarchy
moves its operation to smother city.

Open communication among agencies is paramount in establishing
credible means of tracking and identifying these highly mobile
criminal organizations. The exchange of information must not
only occur among local, state and federal agencies, but it is
increasingly important to coordinate the information flow
internationally. Russian crime groups in the Los Angeles area
commonly interact with Russian groups located in Camada cind the
former Soviet Union. It would be invaluable for local law
enforcement agencies to have a reliable source of identification
and criminal record information in the countries of the FSU.
Persons entering our borders should be positively identified to
facilitate their accurate identification if they are arrested.

Forged amd fictitious passports are all too common. One of the
uncontrollable aspects of ROC activity is the identification of
"Tyazhiki" or shadow people who are undocumented residents of the
Commonwealth of Independent States (CIS) who are hired as
enforcers to travel throughout the United States and Europe to

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194

commit violent acts, including murder. Law enforcement's efforts
to identify these individuals are often frustrated because no
record exists of their entering the country.

COWSIPgRATIOWS AUD RgCOMMENDATIONS

The international nature of the Russian criminal network present
a unique problem to local law enforcement agencies . By their
nature, these networks are ethnocentric and their activities
cross many jurisdictional boundaries. Local law enforcement
agencies lack the resources to effectively investigate these
groups. Effective partnerships have begun to be established with
federal agencies, but these agencies often require a significsmt
threat before committing limited federal resources. It is
vitally important that a coordinated and concerted effort be made
to identify the threat to the United States posed by Russian
organized crime groups, and to work cooperatively to investigate
2uid prosecute those involved.

On the local level, community-based policing is the vehicle for
educating the ethnic Russian community in the standards and
expectations of living in our free and prosperous society. Open
lines of communications must be established between the police
and the community. Trust must be developed. At the same time,
adequate resources must be expended to publicly instill
confidence that criminals will be treated as criminals and not be
dealt with in underground cooperation, as in the FSU. To do this

195

effectively, it is necessary to actively investigate and
incarcerate street level, as well as white collar criminals

On a regional basis, local, state cind federal agencies must
actively pursue open communication. Effective community, police
and government planning must be undertaken now in order to stop
the increase in the criminal activities of these Russian crime
groups .

Task force operations involving local, state emd federal agencies
are an effective means to combat the growing menace of Russian
orgemized crime groups. However, the lack of local resources may
preclude participation. It is recommended that a raeeins be found
CO augment local law enforcement budgets when personnel
participate in a task force dealing with cross -jurisdictional
crimes .

To encourage interagency cooperation and ixiformation flow, a
national data base needs to be established which could provide
information to law enforcement agencies regarding parallel
investigations. The system should be designed as a pointer
system only. The primary investigating agencies would be
notified of inquiries regarding subjects involved in their
investigation. No immediate information would be provided to the
inquirer. The detective/agent who entered the original
information would be notified and, if appropriate, they would
have the option of contacting the inquirer.

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196

The Iramigracion and Naturalization Service must be empowered to
expedite the deportation of repeat criminal offenders. one
Russian source said, "What are you going to do to us in this
country after we have encountered the KGB and Gulag? The only
thing I fear is deportation, and you won't do it." The
unmcuiageahle deportation appeal process needs to be expedited.

In general, the United States needs a new arsenal of
orgcuiizational responses to cope with the complex challenges
arising from Russian organized crime groups. All levels of
government need to be alerted to the growing problem of Russian
organized crime within our borders as well as the international
linkages among organized crime, drug trafficking and terrorism.

197

STATEMENT OF
ANONYMOUS UNDERCOVER POLICE OFFICER

SENATORS, I WELCOME THE OPPORTUNITY TO APPEAR BEFORE
YOUR DISTINGUISHED COMMITTEE.

I WAS BORN AND RAISED IN RUSSIA. I EMIGRATED FROM
RUSSIA TO THE UNITED STATES OF AMERICA IN THE 1970 'S.

I HAVE BEEN A LAW ENFORCEMENT OFFICER FOR MORE THAN TEN
YEARS. I HAVE SERVED IN DIFFERENT CAPACITIES, UNIFORMED PATROL,
HOMICIDE DETECTIVE, AND NARCOTICS DETECTIVE. DURING THE PAST TWO
YEARS, I HAVE BEEN INVOLVED IN NUMEROUS RUSSIAN ORGANIZED CRIME
INVESTIGATIONS.

DUE TO THE FACT THAT I AM INVOLVED IN A NUMBER OF
EXTREMELY SENSITIVE INVESTIGATIONS, I AM TESTIFYING ANONYMOUSLY
IN ORDER NOT TO JEOPARDIZE THESE CASES OR THE SAFETY OF OTHERS.

AS I SAID EARLIER, I GREW UP IN THE FORMER SOVIET
UNION. I WAS RAISED UNDER THE COMMUNIST SYSTEM AND I BELIEVE
THAT I KNOW THE THINKING OF THE PEOPLE WHO WERE BROUGHT UP IN
THAT SYSTEM.

I'M VERY ACTIVE IN THE RUSSIAN EMIGRE COMMUNITY IN THE
CITY IN WHICH I LIVE. I ATTEND MOST OF THE GATHERINGS OF THE
EMIGRES AND CONTINUE TO BE VERY MUCH IN TOUCH WITH THE RUSSIAN
EMIGRES AND THEIR CULTURE. I RECEIVE AND READ MOST OF THE
LITERATURE THAT IS PUBLISHED IN THE RUSSIAN LANGUAGE IN BOTH THE
FORMER SOVIET UNION AS WELL AS HERE IN THE UNITED STATES.

NOW I WOULD LIKE TO TOUCH ON THE SUBJECT OF THE
DIFFERENCE BETWEEN THE CULTURES IN THE REPUBLICS OF THE FORMER
SOVIET UNION AND THE UNITED STATES.

GROWING UP IN RUSSIA, PEOPLE LEARN THE FOLLOWING FROM
THEIR PARENTS, GRANDPARENTS, AND THEIR SURROUNDINGS:

198

IN ORDER TO SURVIVE, THE LESSON IS "SURVIVAL OF THE
FITTEST."

BY THIS I MEAN THAT YOU MUST CONSTANTLY STRUGGLE AND
MANIPULATE THE SYSTEM; THAT YOU HAVE TO ADJUST AND DO WHATEVER IS
NECESSARY TO "GET AHEAD." AND THE ENDS JUSTIFY THE MEANS.

DURING THE COMMUNIST REGIME, FOR MANY PEOPLE, THE MORAL
VALUES ACCEPTED IN A FREE SOCIETY WERE "DESTROYED," MAYBE WITH A
FEW EXCEPTIONS.

RUSSIAN PEOPLE GREW UP WITH THE UNDERSTANDING THAT
STEALING SOMETHING FROM THEIR PLACE OF EMPLOYMENT IS NOT A CRIME.
MAYBE BECAUSE ONE WAS NOT STEALING FROM A FRIEND BUT RATHER FROM
A "SYSTEM."

THEY ALSO GREW UP WITH THE UNDERSTANDING THAT THE RULES
WERE MADE TO BE BENT OR BYPASSED.

THAT MENTALITY, PHILOSOPHY AND UPBRINGING EXPLAINS WHY
SOME OF THE RUSSIAN EMIGRES, (MANY OF WHOM WERE EDUCATED, FAMILY
PEOPLE) GOT INVOLVED IN WHITE COLLAR-TYPE CRIMINAL ACTIVITY HERE
IN THE UNITED STATES.

PRIOR TO THE DISINTEGRATION OF THE FORMER SOVIET UNION
OR "PERESTROIKA," WE DID HAVE A NUMBER OF VIOLENT RUSSIAN
CRIMINALS WHO EMIGRATED TO THE UNITED STATES BUT THESE WERE VERY
SMALL IN NUMBER.

UP UNTIL "PERESTROIKA," THE METHOD BY WHICH "SUCCESS"
WAS JUDGED IN THE USSR WAS THE LEVEL OF A PERSON'S EDUCATION.
DOCTORS, ENGINEERS, TEACHERS, SCIENTISTS, WERE ALL ACCORDED A
SOMEWHAT HIGHER STATUS IN SOCIETY.. WEALTH WAS NOT A FACTOR AS A
WORKER IN A FACTORY WAS MAKING AS MUCH MONEY AS A DOCTOR DID.
AND THE PEOPLE WHO DID MAKE MONEY IN THE UNDERGROUND ECONOMY OR
BLACK MARKET OPERATIONS WERE CONCEALING THEIR WEALTH.

199

AFTER "PERESTROIKA," THIS SITUATION WAS REVERSED AND
THE WEALTHY PEOPLE ROSE TO THE TOP OF SOCIETY.

WITH "PERESTROIKA," ORGANIZED CRIME FLOURISHED IN
RUSSIA.

NOW, I WOULD LIKE TO EXPLAIN HOW THESE CRIMINAL GROUPS
"EMERGED." THERE WERE A NUMBER OF YOUNG PEOPLE WHO WERE
ENERGETIC BUT IMPATIENT OR UNABLE TO BUILD UP THEIR OWN BUSINESS
OVER A PERIOD OF TIME. THESE PEOPLE STARTED TO FORM CRIMINAL
GROUPS BASED ON THEIR AFFILIATIONS WITH NEIGHBORHOODS OR CITIES.
THE GROUPS WERE LED BY EITHER PROFESSIONAL CRIMINALS OR PEOPLE
WITH LEADERSHIP ABILITIES AND SIMILIAR INTERESTS. THESE GROUPS
STARTED TO "PREY" ON THE NEW RUSSIAN BUSINESS SOCIETY. THEY
CONTINUED TO GROW AND SOME OF THE CRIMINAL ORGANIZATIONS ARE NOW
SEVERAL THOUSAND MEMBERS STRONG.

THEY WOULD EXTORT MONEY, KIDNAP PEOPLE FOR RANSOM, AND
ORGANIZED COLLECTION AGENCIES WHICH USED VERY UNORTHODOX METHODS.

ANOTHER NEW INDUSTRY BEGAN TO EMERGE: THAT OF "MURDER
FOR HIRE." BUSINESS PEOPLE WOULD USE THESE HIRED KILLERS TO WIPE
OUT THEIR COMPETITION AND THEREBY GIVE A LESSON TO OTHERS, "DON'T
FOOL AROUND WITH MY COMPANY OR THE AREA THAT I'M OPERATING IN."

INFORMATION HAS BEEN DEVELOPED THAT MANY OF THESE
MURDERS WERE COMMITTED IN RUSSIA BY PEOPLE WITH EXTENSIVE
MILITARY BACKGROUNDS.

THESE ACTIONS FORCED THE BUSINESS PEOPLE TO EACH BEGIN
LOOKING FOR (QUOTE) "PROTECTION" (END-QUOTE) . AND, A NEW AND
VERY PROFITABLE BUSINESS CALLED "KRISHA, " MEANING "ROOF" IN
ENGLISH, CAME INTO BEING.

200

VERY FEW BUSINESSES IN RUSSIA COULD SURVIVE WITHOUT
THIS PROTECTION. UP TO FIFTY PERCENT OF THEIR INCOME IS DIVERTED
BY THE LEGITIMATE BUSINESSES TO CRIMINAL ORGANIZATIONS IN RETURN
FOR THIS PROTECTION.

WITH THE NEW ABILITY TO TRAVEL FREELY, WE SEE RUSSIAN
CRIMINAL ORGANIZATIONS ESTABLISHING THEIR ROOTS, THEIR TIES, HERE
IN THE UNITED STATES OF AMERICA.

ANOTHER IMPORTANT POINT IS THAT DURING THE COMMUNIST
REGIME, THERE WAS, IN EFFECT, A SYSTEM WHERE A PRIVILEGED CLASS
OP THE COMMUNIST GOVERNMENT OFFICIALS WAS DEVELOPED. THERE WAS
ALMOST A "CLOSED SOCIETY" OF THE COMMUNIST BUREAUCRACY AND IT WAS
NEARLY IMPOSSIBLE TO BECOME A PART OF IT UNLESS ONE WAS WELL
CONNECTED .

HOWEVER, WITH THE DISMANTLING OF THE SOVIET UNION,
THESE PEOPLE REMAINED IN OFFICE, BUT NO LONGER UNDER THE
COMMUNIST SYSTEM WHICH GUARANTEED THEM A BETTER LIFE. THEY BEGAN
TO SEE THAT HONEY IS THE CRITERIA ON WHICH PEOPLE WERE JUDGED.
VET, THEY HAD THE POWER TO ISSUE LICENSES, PERMITS, VALUABLE
GOVERNMENT CONTRACTS, SET CUSTOMS DUTIES ON GOODS IMPORTED INTO
THE FORMER SOVIET UNION, OR SET STANDARDS FOR THE EXPORT OF
RUSSIA'S VALUABLE COMMODITIES, FOR EXAMPLE, ITS NATURAL
RESOURCES .

MANY OF THESE GOVERNMENT OFFICIALS BEGAN TO TAKE
ADVANTAGE OF THEIR POSITIONS DUE TO THIS PERCEPTION. THEY OR
MEMBERS OF THEIR FAMILIES BECAME (QUOTE) "PARTNERS" (ENDQUOTE) IN
BUSINESS ENTERPRISES OR, IN EFFECT, "SOLD" THEIR POWER AND
AUTHORITY.

INFORMATION DEVELOPED SHOWS THAT MANY RUSSIAN
GOVERNMENT OFFICIALS, WORKING ON A MODEST SALARY, AMASSED VAST
SUMS IN THIS FASHION. THESE SAME CORRUPT OFFICIALS PUT THE
PROFITS FROM THIS ACTIVITY IN BANK ACCOUNTS ALL OVER THE WORLD
AND PURCHASE REAL ESTATE OR OTHER PROPERTY IN VARIOUS COUNTRIES
INCLUDING THE UNITED STATES OF AMERICA.

201

IN ADDITION, MANY OF THE FORMER INTELLIGENCE, LAW
ENFORCEMENT, AGENTS AND LEADERS PERCEIVED THAT THEY WERE "ON THE
BOTTOM" SO TO SPEAK, OF THE NEW AND EMERGING WEALTHY RUSSIAN
SOCIETY. THEIR SERVICES AND KNOWLEDGE BECAME A VALUABLE
COMMODITY TO THE EMERGING CRIMINAL GROUPS.

IN SPEAKING WITH A NUMBER OF SOURCES OF INFORMATION
OVER THE PAST COUPLE OF YEARS, I HAVE LEARNED THAT INDIVIDUALS
AND BUSINESSES AFFILIATED WITH THE FORMER SOVIET INTELLIGENCE
ORGANIZATIONS ARE BEING USED BY THE RUSSIAN ORGANIZED CRIME
GROUPS ALL OVER THE WORLD, INCLUDING THE UNITED STATES. WHILE I
CANNOT GO INTO THE SPECIFICS OF THIS, I CAN SAY THAT THE
INFORMATION DEVELOPED SHOWS THAT THE FORMER INTELLIGENCE OFFICERS
ARE WORKING IN LEAGUE WITH RUSSIAN ORGANIZED CRIME AND MAKING
HUGE PROFITS IN THE PROCESS.

AMONG THE STRONGEST RUSSIAN CRIMINAL ORGANIZATIONS
WHICH ARE OPERATING TODAY ARE THE FOLLOWING GROUPS:

1. IZMAILOVSKAYA ORGANIZATION. THIS IS BASED IN
MOSCOW AND IS SEVERAL THOUSAND MEMBERS STRONG. ITS LEADERS RESIDE
IN RUSSIA AND ISRAEL. THE GROUP USES QUASI -MILITARY RANKS AND IS
VERY STRICT IN DISCIPLINING ITS MEMBERS. IT IS INVOLVED
EXTENSIVELY IN MURDER-FOR-HIRE, EXTORTIONS AND INFILTRATION OF
LEGITIMATE BUSINESSES.

2. SOLNTSEVSKAYA ORGANIZATION. THIS IS BASED IN
MOSCOW. ITS LEADERS RESIDE IN RUSSIA, CENTRAL EUROPE AND ISRAEL.
THE GROUP IS ACTIVE IN EXTORTIONS, INFILTRATION OF LEGITIMATE
BUSINESSES, COUNTERFEITING AND THE TRAFFICKING IN ILLEGAL DRUGS.

3. PODOLSKAYA ORGANIZATION. THIS IS BASED IN MOSCOW,
ITS LEADERS RESIDE IN RUSSIA. THE GROUP IS ACTIVE IN EXTORTIONS,
INFILTRATION OF LEGITIMATE BUSINESS AND THE TRAFFICKING IN
ILLEGAL DRUGS.

202

OTHER ORGANIZATIONS INCLUDE:

KUNTSEVSKAYA BAIASHIKHIN (BALASHIXHINSKAYA)

KURGANSKAYA BAUMANSKAYA

MAZUTKINSKAYA CHECHEN CRIMINAL ORGANIZATION (SEVERAL BRIGADES)

PUSHKINSKAYA DAGESTANI

TAGANSKAYA DOLGOPRUDENSKAYA

TAMBOVSKAYA KAZANSKAYA

VORKUTA »

UNTIL LAST YEAR, THERE WAS A RUSSIAN CRIMINAL
ORGANIZATION OPERATING IN THE NEW YORK AREA WHICH WAS HEADED BY
AN INDIVIDUAL WITH AN EXTENSIVE CRIMINAL BACKGROUND IN RUSSIA.
THIS PARTICULAR ORGANIZATION HAD MEMBERS OR ASSOCIATES NOT ONLY
IN NEW YORK CITY BUT STRETCHED ACROSS THE UNITED STATES. THE
ORGANIZATION WAS CRIPPLED DDE TO THE RECENT ARRESTS OF ITS LEADER
AND SEVERAL MEMBERS ON RACKETEERING CHARGES.

WE HAVE BEEN ABLE TO LINK SEVERAL MURDERS WHICH HAVE
OCCURRED IN THE UNITED STATES TO RUSSIAN ORGANIZED CRIME GROUPS.

DURING THE 1980 'S AND 1990 'S, THE UNITED STATES OF
AMERICA LOST BILLIONS OF DOLLARS IN TAX REVENUE WHEN RUSSIAN
CRIMINALS ORGANIZED A FUEL TAX SCAM. SEVERAL CASES HAVE BEEN
SUCCESSFULLY PROSECUTED IN THE U.S., IN SUCH CITIES AS NEWARK,
PHILADELPHIA, ATLANTA AND NEW YORK. THERE ARE OTHERS UNDER
INDICTMENT AT THIS TIME IN NEW JERSEY AND LOS ANGELES.

THIS CASE ALSO SHOWED US THAT RUSSIAN CRIMINALS WERE
OPEN TO COOPERATION WITH OTHER CRIMINAL GROUPS.

ONE TYPE OF GROUP WITH WHOM THE RUSSIAN ORGANIZED CRIME
FIGURES HAVE WORKED ARE THE ITALIAN-AMERICAN ORGANIZED CRIME
"FAMILIES" OPERATING IN THE NEW YORK-NEW JERSEY AREA. IN THIS
PARTICULAR INSTANCE, THE RUSSIAN CRIMINALS PAID THE ITALIAN-
AMERICAN CRIMINAL GROUPS A "TAX" AMOUNTING TO A CERTAIN
PERCENTAGE OF THEIR PROFITS, IN RETURN FOR THE ABILITY TO OPERATE
IN THE AREAS UNDER THEIR INFLUENCE OR CONTROL.

203

SINCE THAT TIME, WE PEVELOPED INFORMATION ABOUT
CONTINUING COOPERATION OF RUSSIAN ORGANIZED CRIME FIGURES WITH
ITALIAN-AMERICAN CRIMINAL GROUPS.

WE ALSO DEVELOPED INFORMATION ABOUT INCREASING
COOPERATION BETWEEN RUSSIAN ORGANIZED CRIME AND COLOMBIAN DRUG
CARTELS. THE RUSSIAN ORGANIZED CRIME GROUPS ARE BELIEVED TO BE
HEAVILV INVOLVED IN THE LAUNDERING OF THE PROFITS OF THESE
COLOMBIAN DRUG CARTELS. THEY HAVE ALSO ESTABLISHED A CONTINUOUS
FLOW OF COCAINE FROM COLOMBIA TO EASTERN EUROPE AND RUSSIA,
IT HAS E:VEN been RECENTLY REPORTED IN NEWSPAPERS THAT DRUG
DEALERS IN COLOMBIA ARE USING FORMER SOVIET MILITARY TRANSPORT
AIRCRAFT TO MOVE QUANTITIES OF COCAINE.

TO DESCRIBE A TYPICAL ACTIVITY OF RUSSIAN ORGANIZED
CRIME, I CAN BRING THE FOLLOWING EXAMPLE:

A HARDWORKING RUSSIAN BUSINESSMAN OPERATING IN THE
HEAVILY POPXnATED RUSSIAN AREA OF A MAJOR CITY IS VISITED BY
SEVERAL MALES. THEY TELL THE BUSINESSMAN THAT EITHER FOR A
CERTAIN PERCENTAGE OF HIS BUSINESS OR REGULAR PAYMENTS, THEY WILL
"PROTECT" HIS ESTABLISHMENT.

IF THE BUSINESSMAN REPLIES THAT HE DOES NOT FEEL THAT
HE NEEDS THAT PROTECTION, IN THE NEAR FUTURE, STRANGE THINGS WILL
HAPPEN TO HIS FAMILY OR HIMSELF. ROBBERIES MAY TAKE PLACE »-HIS
ESTABLISHMENT. ACTS OF VANDALISM WILL OCCURR. THREATENING PHONE
CALLS WILL BE RECEIVED AND/OR VIOLENT ACTS AGAINST HIM OR MEMBERS
OF HIS FAMILY WILL TAKE PLACE.

THE SAME PEOPLE WILL VISIT THE BUSINESSMAN AGAIN, AND,
NOW CONVINCED THAT HE DOES NEED PROTECTION, THE BUSINESSMAN WILL
START PAYING.

MANY OF THE CASES OF WHICH I HAVE KNOWLEDGE OR HAVE
BEEN PERSONALLY INVOLVED, ARE CURRENTLY UNDER ACTIVE
INVESTIGATION, AND THEREFORE I AM NOT DESCRIBING THESE OR
COMMENTING FURTHER.

204

SENATORS, I HAVE BEEN ASKED BY YOUR STAFF WHETHER 1
HAVE ANY ADVICE FOR THE COMMITTEE ON HOW TO COMBAT RUSSIAN
ORGANIZED CRIME. I WOULD LIKE TO MAKE A FEW SUGGESTIONS THAT
MOULD COME NOT ONLY FROM ME BUT FROM LAW ENFORCEMENT PERSONNEL
WITH WHOM I AM WORKING ON FEDERAL, STATE AND LOCAL LEVELS.

FORMAL TASK FORCES SHOULD BE ESTABLISHED IN MAJOR
METROPOLITAN AREAS, CONSISTING OF FEDERAL, STATE AND LOCAL
OFFICERS. WHAT THESE TASK FORCES COULD DO IS ACTIVELY GATHER
INFORMATION ABOUT RUSSIAN ORGANIZED CRIME ACTIVITY IN THEIR
CITIES, AND CONDUCT INVESTIGATIONS AGAINST THESE SUBJECTS. THE
TASK FORCES SHOULD ESTABLISH LIAISON CONTACTS WITH LAW
ENFORCEMENT AGENCIES THROUGHOUT THE WORLD, SINCE RUSSIAN
ORGANIZED CRIME GROUPS OPERATE ON A GLOBAL SCALE.

ONE OF THE MOST GLARING GAPS IN THE FIGHT AGAINST
RUSSIAN ORGANIZED CRIME IS THE LACK OF AN EXTRADITION TREATY
BETWEEN THE UNITED STATES OF AMERICA AND THE FORMER SOVIET
REPUBLICS. THIS HAS ENABLED MANY RUSSIAN CRIMINALS, ASSOCIATED
WITH ORGANIZED CRIME AND SOUGHT AS FUGITIVES BY RUSSIAN
AUTHORITIES, TO SEEK REFUGE IN THE UNITED STATES. BY THE SAME
TOKEN, RUSSIAN CRIMINALS WHO HAVE BEEN COMMITTING CRIMES IN THE
UNITED STATES HAVE SUBSEQUENTLY LEFT FOR RUSSIA AND FOUND SAFE
HAVEN THERE.

WHAT COULD BE ACCOMPLISHED BY ADDRESSING THESE MATTERS,
HOWEVER, IS A "SLOWING DOWN," BUT NOT A COMPLETE HALT, TO THE
GROWING PROBLEM OF RUSSIAN ORGANIZED CRIME IN THE UNITED STATES
OF AMERICA.

THANK YOU FOR THE OPPORTUNITY TO APPEAR BEFORE YOUR
DISTINGUISHED COMMITTEE.

205

206

BOSTON PUBLIC LIBRARY

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ISBN 0-16-053632-4

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Full text of "Russian organized crime in the United States : hearing before the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, United States Senate, One Hundred Fourth Congress, second session, May 15, 1996"

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